DIPP’s major impetus towards ease of doing business in India

The Department of Industrial Policy and Promotion (“DIPP”) has vide Press Note No. 1 – 2018 Series (“Press Note 1”) sought to review the extant Foreign Direct Investment (“FDI”) policy on various sectors and has sought to incorporate several amendments to the Consolidated FDI Policy Circular of 2017 as amended from time to time (“FDI Policy”). These amendments will come into effect from the date they have been notified under the Foreign Exchange Management Act, 1999.

Policy Level changes to the FDI Policy sought to be brought about vide Press Note 1 are enumerated below: 

1. Schedule 3 – Provisions Relating to Issue/Transfer of Shares – Conversion of External Commercial Borrowings (“ECB”)/Lump sum Fee/Royalty etc. into Equity  

Under the FDI Policy, subject to certain conditions, issue of equity shares under the government route is allowed for import of capital goods/ machinery/ equipment (excluding second-hand machinery) and pre-operative/pre-incorporation expenses (including payments of rent etc.). However, vide the Press Note 1, DIPP seeks to allow issue of equity shares under the government approval route towards the aforementioned, only for sectors requiring government approval under the FDI Policy. Further, a new general condition has been sought to be incorporated, that, for sectors under automatic route, issue of equity shares against the import of capital goods/ machinery/ equipment (excluding second-hand machinery) and pre-operative/pre-incorporation expenses (including payments of rent etc.), shall be permitted under the automatic route subject to compliance with respective conditions mentioned above and reporting to RBI in form FC-GPR as per procedure prescribed under the FDI Policy.  

2. Single Brand Product Retail Trading 

One of the major changes sought to be brought about by DIPP vide the Press Note 1 is, 100% FDI to be allowed in Single Brand Retail Trading (“SBRT”) under the automatic route. Currently, FDI is allowed under the automatic route only up to 49% and beyond 49%, government approval is required.

In respect of proposals involving FDI beyond 51%, the requirement towards sourcing from India (preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors), 30% of the value of goods purchased by such entities, shall continue to apply. However, it is now sought that the SBRT entity be permitted to set-off its incremental sourcing of goods from India for global operations during the initial 5 years (beginning 1st April of the year of the opening of first store) against the mandatory sourcing requirement of 30% of purchase from India. It also seeks to clarify that, incremental sourcing will mean the increase in terms of value of such global sourcing from India for that single brand in a particular financial year from India over the preceding financial year, by the non-resident entities undertaking single brand retain trading, either directly or through its group companies.

After completion of this 5 years period, the SBRT entity shall be required to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis.

All the other conditions as enumerated in the FDI policy, towards FDI in SBRT, shall continue as is.

3. Simplification of extant policy on FDI into an Indian company engaged only in the activity of investing in the capital of other Indian company(ies) (“Investing Company(ies)”) 

Vide Press Note 1, DIPP has sought that, FDI into Investing Company(ies), registered as Non-Banking Financial Companies (NBFC) with Reserve Bank of India (being overall regulated), should now be 100% under automatic route. Such investments are currently permitted only under government approval route.

Further, Press Note 1 seeks that, FDI in Investing Company(ies) which are:

1. Core Investment Companies (CIC) and other investing Companies, engaged in the activity of investing in the capital of any other Indian Company/ies/LLP; and
2. following RBI regulatory framework policy for CICs,

should now be permitted under government approval route.

4. Power Exchanges  

As per the FDI Policy, FDI upto 49% is currently permitted under the automatic route and Foreign Institutional Investor (“FII”) / Foreign Portfolio Investment (“FPI”) purchases are restricted to secondary market stands only. However, vide the Press Note 1, DIPP has sought that the restriction of FII / FPI towards purchasing only via the secondary market be done away with.

5. Prohibition of restrictive conditions regarding audit firms 

In the event that, towards the audit of an Indian investee company, a foreign investor wishes to specify a particular auditor/audit firm having an international network, then, Press Note 1 seeks that, such audit should be carried out as a joint audit wherein both the auditors should be part of different networks.

This proposed amendment to the FDI Policy is very ambiguous. Firstly, the terms ‘international network’ and ‘different networks’ have loosely used and may be widely interpreted. For e.g.: Would it also include to mean a foreign firm having an Indian subsidiary. Secondly, it provides that a ‘joint audit’ has to be carried out. However, it is not clear from the language of the amendment as to who shall be conducting the audit. Further, the rationale for the Indian resident auditor is not known.

Sectoral changes to the FDI Policy sought to be brought about vide Press Note 1 are enumerated below: 

1. Pharmaceuticals 

As per the FDI Policy, FDI up to 100%, under the automatic route is currently permitted for manufacturing of medical devices. The definition of “Medical Device” includes – “a device which is reagent, reagent product, calibrator, control material, kit, instrument, apparatus, equipment or system whether used alone or in combination thereof intended to be used for examination and providing information for medical or diagnostic purposes by means of in vitro examination of specimens derived from the human body or animals.” However, vide the Press Note 1, DIPP seeks to amend the aforementioned part to the effect that such a device shall have to be an in-vitro diagnostic device for medical or diagnostic purposes by means of any examination (not specifically ‘in-vitro’ examination) of specimens derived from the human body or animals.

Through this proposed amendment, DIPP has also sought to de-link the FDI Policy from the drugs related laws in India and therefore seeks to specify the category of medical devices under the larger ambit of medical devices where 100% FDI is permitted under the automatic route.

2. Construction Development: Townships, Housing, Built-up Infrastructure and Real Estate Broking 

A new clarificatory note has been sought to be incorporated vide the Press Note 1 stating that, real-estate broking services does not amount to real estate business and 100% foreign investment is allowed in real-estate broking services activity under the automatic route.

3. Civil Aviation 

FDI Policy provided a specific exclusion wherein, foreign airlines were allowed to, up to the limit of 49% of their paid of capital and subject to certain conditions, invest in the capital of all Indian companies operating scheduled and non-scheduled air transport services, except for Air India Limited.

However, vide the Press Note 1, DIPP has sought that:

1. this specific exclusion carved out for Air India Limited be done away with; and
2. along with the other conditions already enumerated under the FDI Policy, the following conditions be applicable for FDI in Air India Limited:
   • FDI in Air India Limited including that of foreign airline(s) to not exceed more than 49% directly or indirectly; and
   • Substantial ownership and control of Air India Limited to continue to be vested in Indian Nationals.

Other changes sought to be brought about 

Currently, applications involving FDI from Countries of Concern, i.e., Pakistan and Bangladesh (“CoC”) require certain security clearances in the manner provided in extant policies and guidelines (“CoC Applications”), irrespective of the route of investment which are being processed by the Ministry of Home Affairs.

However, vide the Press Note 1, DIPP provides that:

1. CoC Applications falling under automatic route sectors/activities be processed by the DIPP; and
2. CoC Applications falling under the government approval route sectors/activities be processed by the Nodal Administrative Ministries/Departments.

CONCLUSION  

From the aforementioned changes sought to be brought about in the FDI Policy it can be noted that, vide Press Note 1 the government of India has very early on in this year, taken long strides, towards liberalising the extant FDI Policy and promoting ease of doing business in India.