With India moving up by 12 ranks from 142 to 130 on the World Bank’s ease of doing business rankings, the Indian Government has taken a giant leap to change its image as an attractive investment destination by undertaking certain structural reforms, including by revising limits for foreign investment in various sectors. These changes are being viewed as some of the most significant reforms since the Indian economy first opened up in 1991.
The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India has amended the Consolidated Foreign Direct Investment (FDI) Policy on 24 November 2015 through its Press Note No. 12 (2015) Series (Press Note). Much recently, the Reserve Bank of India has also issued a notification on 16 November 2015 (Notification) for opening up of foreign participation into Alternative Investment Funds, Real Estate Investment Trusts and Infrastructure Investment Trusts.
NRI Investments on Non-Repatriation Basis
All investments by Non Resident Indians (NRI), including through companies, trusts and partnership firms incorporated outside India which are owned and controlled by NRIs, on non-repatriation basis are now deemed to be a domestic investments at par with the investment made by Indian residents.
CCEA Threshold Limit increased to INR 5,000 Crores
The threshold limit for approval by Foreign Investment Promotion Board (FIPB), for investment in sectors that are under government approval route, has been increased from INR 3,000 crore to INR 5,000 crore, beyond which proposals will be placed for consideration before the Cabinet Committee on Economic Affairs (CCEA).
Investment by way of Swap of Shares
No government approval is required for investment in automatic route sectors by way of swap of shares.
Sector Specific Reforms
Following is a brief round-up of the clarifications and changes introduced in some key sectors:
PARTICULARS / SECTORS
Alternate Investment Funds (AIFs)
No FDI permitted
Foreign investment in AIFs, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITS) can now be made without any specific approval from RBI or FIPB, by any person outside India (including Foreign Portfolio Investors (FPIs) and non-resident Indians (NRIs), subject to prescribed conditions
FDI in manufacturing by Micro, Small and Medium Enterprises (MSMEs) was permitted under the approval route
FDI in manufacturing now fully permitted under automatic route Manufacturers now permitted to sell products through e-commerce and otherwise through wholesale and/or retail (single brand retail), without any approval
Limited Liability Partnerships (LLPs)
Earlier, FDI in LLPs was permitted under approval route, subject to conditions
100% FDI in LLPs is now permitted under the automatic route. As earlier, such FDI can be made only in LLPs operating in sectors / activities where 100% FDI is allowed, through the automatic route and without any FDI-linked performance conditions
The terms ‘ownership’ and ‘control’ with reference to LLPs have been defined. An LLP will be considered to be owned and controlled by resident Indians if more than 50% of the investment is contributed by them.
LLPs can have control through majority of designated partners that are non-residents so long as such partners do not have control over policies of LLP with exclusion to others
Downstream Investment by LLPs
Permission for downstream investment was only limited to companies
Akin to companies, an LLP with FDI will be permitted to make downstream investments in another company or LLPs operating in sectors in which 100% FDI is allowed under the automatic route, and there are no FDI-linked performance conditions
Foreign investment was permitted up to 49% under the approval route. Portfolio investment and investments by Foreign Venture Capital Investors were permitted up to 24% only under automatic route Proposals for foreign investment in excess of 49% to be considered by the Cabinet Committee on Security (CCS)
Aggregate foreign investment is now permitted up to 49% under the automatic route, irrespective of the investment route
Proposals for foreign investment in excess of 49% require approval of FIPB instead of CCS
Several performance related conditions have been removed
Cash and Carry Wholesale Trading / Wholesale Trading (including sourcing from MSMEs)
A wholesale / cash and carry trader was restricted from opening retail shops to sell to the consumer directly
A single entity can now undertake both Single Brand Retail Trading (SBRT) and wholesale trading activities, subject to compliance with conditions on wholesale / cash and carry, and SBRT by both the business arms
Earlier, the local sourcing requirement was required to be met (i) initially as an average of 5 years’ total value of the goods purchased, beginning 1st April of the year during which the first tranche of FDI is received and (ii) post this period, on an annual basis Any retail trading, by means of e-commerce was prohibited
The procurement requirement is now required to be met annually from the date of commencement of the business, i.e. opening of the first store An SBRT entity having physical presence, will now be permitted to operate through e-commerce plat-form as well Local sourcing norms can be relaxed where entities are engaged in SBRT of products involving ‘state-of-art’ and ‘cutting-edge technology’ An SBRT entity having an ‘Indian brand’ can sell its own branded products by way of wholesale and retail (including through e-commerce) provided it manufactures minimum of 70% products in-house and sources maximum of 30% products from other Indian manufacturers
Duty free shops
No existing provisions
100% FDI is now permitted under automatic route in duty free shops located and operated in the customs bonded areas
Construction and Development
Minimum area to be developed under each project was required to be as under:
In case of development of serviced plots, no minimum land area requirement In case of construction development projects, a minimum floor area of 20,000 sq meter
Investee company was required to bring minimum FDI of USD 5 million within 6 months of commencement of the project
Conditions relating to (i) minimum land area requirement of 20,000 sq meter, and (ii) minimum capitalisation requirement of USD 5 million have been removed Each phase of the project is to be considered as a separate project FDI in completed projects will be locked in for 3 years from the date of investment and the immovable property may not be transferred during such period No lock-in period or approval requirement for transfer of stake from one non-resident to another non-resident
Banking –Private Sector
Full fungibility of foreign investment has been introduced Foreign Institutional Investors / Foreign Portfolio Investors and Qualified Foreign Investors can now invest up to the sectoral limit of 74%, subject to prescribed conditions, and provided that there is no change of control and management of the investee company
Sectoral caps have been increased with easier compliance norms in various other sectors such as plantation, civil aviation, satellites, agriculture and animal husbandry and mining and minerals
By no measure are these reforms inconsequential. Cutting across variety of sectors and dealing with several broader investment issues, the latest changes will go a long way in further easing foreign investments in India.
- Aakash Choubey (Partner), Kinshuk Jhunjhunwala (Senior Associate) and Shreya Dua (Associate)
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