The recent amendments to India’s foreign direct investment (FDI) rules allow foreign airlines to invest up to 49% in Air India, adding new wings for the nation’s flag carrier that has been wholly owned by the government. The amendments also allow up to 100% FDI in single brand retail trading, among other key changes aimed at relaxing the FDI regime.
The Union Cabinet on 10 January 2018 approved several amendments to India’s FDI policy. Here are some of the key changes.
Single Brand Retail Trading
FDI is now permitted in Single Brand Retail Trading (SBRT) up to 100% under the automatic route (i.e. without prior government approval), subject to certain conditions. One of the main conditions is with respect to the sourcing of goods. Where FDI exceeds 51%, 30% of the value of goods purchased is to be sourced from India, preferably from micro, small, and medium enterprises, village and cottage industries, artisans, and craftsmen. With the amendment, an SBRT entity is permitted to set off the mandatory sourcing requirement against its incremental sourcing of goods from India for its global operations during the initial five years, commencing on April 1 of the year of opening of the first store in India. After the five-year period, an SBRT entity will need to meet the 30% sourcing requirement on an annual basis with respect to its India operations. Prior to the amendment, FDI was permitted in SBRT up to 49% under the automatic route and beyond 49% under the government approval route (i.e. with prior government approval).
Foreign airlines are currently allowed to invest up to 49% under the government approval route in Indian companies operating scheduled and non-scheduled air transport services. However, this allowance was not applicable to Air India, which is wholly owned by the government. The amendment specifically allows foreign airlines to invest up to 49% in Air India under the government approval route provided total foreign investments in Air India including that of foreign airlines does not exceed 49% and substantial ownership and effective control of Air India vests in Indian nationals.
Real Estate Brokerage
FDI in the real estate business is not permitted under the FDI policy. The amendment has clarified that real estate brokerage services do not constitute real estate business and therefore FDI is permitted up to 100% in real estate brokerage services under the automatic route.
Issue of Shares for Non-Cash Consideration
Under the FDI policy, equity shares can be issued against non-cash consideration such as pre-incorporation expenses and import of machinery, under the government route. The amendment permits such issuance under the automatic route in sectors that fall under the automatic route.
The FDI policy permits FDI up to 49% in power exchanges under the automatic route. However, FDI by foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) in power exchanges was only permitted through the secondary market. The amendment now permits FIIs and FPIs to invest through the primary market.
A new provision has been introduced in the FDI policy relating to joint audits of companies with foreign investment. In the event a foreign investor specifies an audit firm/auditor that has an international network, for the Indian investee company, then the audit of such investee company will need to be undertaken as a joint audit along with an auditor who is not part of the same network. This is likely an encouraging step for local audit firms in India.
It will be interesting to see the industry response to these changes, especially the SBRT market which will likely see some entrants this year.