The Union cabinet has approved major amendments in the Foreign Direct Investment (hereinafter referred to as ‘FDI’) policy on 10 January 2018 which have been introduced with the intention of liberalizing and simplifying the extant policy on FDI for offering ease of doing business in the country. The government has stated that the country had potential to attract far more foreign investment, which could have been achieved only through further liberalizing and simplifying the FDI regime. In furtherance of the same, these amendments are aimed at yielding larger FDI inflows to increase investment, income and employment. Note that during the year 2014-15, total FDI inflows received were US $ 45.15 billion as against a total FDI of US $ 60.08 billion in the financial year 2016-17, which is an all-time high.
Changes introduced in key sectors:
a. Single Brand Retail Trading
100% FDI under automatic route is now permitted for Single Brand Retail Trading as it has been decided by the government to permit single brand retail trading entity to set off its incremental sourcing of goods from India for global operations during initial 5 years which would begin from 1st of April of the year in which the first store is opened against the mandatory sourcing requirement of 30% of purchases from India.
In this regard, note that after completion of this 5 year period, the Single Brand Retail Trading entity shall be required to meet the 30% sourcing norms directly towards its Indian operation, on an annual basis.
b. Civil Aviation
Foreign airlines have now been permitted to invest up to 49% in the capital of Indian companies under approval route in Air India subject to the following two conditions:
- FDI in Air India including that of foreign airlines shall not exceed 49% either directly or indirectly
- Substantial ownership and effective control of Air India shall continue to be vested in Indian National.
c. Construction Development: Townships, Housing, Built-up Infrastructure and Real Estate Broking Services
Government has now permitted 100% FDI under automatic route. Further, the government has also clarified that that the real-estate broking service does not amount to real estate business.
Earlier, the FDI policy on Pharmaceuticals sector provided that definition of medical device as contained in the FDI Policy was subject to amendment in the Drugs and Cosmetics Act. In furtherance of the same, the government has now stated that the definition of medical devices as contained in the FDI Policy was complete in itself and thus, the reference has now been dropped. It has also been decided to amend the definition of ‘medical devices’ as contained in the FDI Policy.
e. Power Exchanges
The government has now permitted 49% FDI under automatic route in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010.
Foreign Portfolio Investors /Foreign Institutional Investors were earlier restricted for investing in Power Exchanges engaged in secondary market only. However, the government has now allowed them to invest in secondary as well as primary market.
Other approval requirements under FDI Policy:
(i) The government has now permitted the issue of shares against non-cash considerations like pre-incorporation expenses, import of machinery etc. in case of sectors under automatic route.
(ii) FDI in an Indian company that is engaged solely in the activity of investing in the capital of other Indian companies or LLPs and in the Core Investing Companies regulated by a financial sector regulator, would now be allowed for foreign investment up to 100% under automatic route; and, if they are not regulated by any Financial Sector Regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100% will be allowed under Government approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government.
Competent Authority for examining FDI proposals from countries of concern:
For FDI in automatic route sectors which require approval only on the matter of investment being from country of concern, FDI applications would be processed by Department of Industrial Policy & Promotion (DIPP) for Government approval. Cases under the government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by concerned Administrative Department/Ministry.
Prohibition of restrictive conditions regarding audit firms:
FDI with the fresh amendments has set a policy stating that wherever the foreign investor wishes to specify a particular auditor or audit firm having international network for the Indian investee company, then the audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network.
Positive steps have been taken by the government to allow more investment into the country. This liberalization of FDI norms by the government seeks to enable international investor companies to invest in India and bring along with them latest technologies and business practices into India.