The Government last week issued announced major reforms ("Reforms") in several sectors in respect of Foreign Direct Investment (FDI). The objective of the Government is to ease the process of foreign investments in the country and bring substantial foreign investments under the automatic route in order to avoid the delay in FDI investment in India. These Reforms are also another example of the Government’s emphasis on the ease of doing business. The Key Reforms are as follows:
1. Limited Liability Partnership (LLP): As per the Reforms, FDI in LLPs is now permitted under the automatic route in sectors in which 100% FDI is allowed under the automatic route and in which there are no FDI linked performance conditions. Further, LLPs with FDI are now permitted to make downstream investments in companies or LLPs engaged in sectors in which 100% FDI is allowed under the automatic route and in which there are no FDI linked performance conditions.
2. Construction Development Sector: FDI in the construction projects is permitted under the automatic route, subject to fulfilment of certain conditions. The Reforms have liberalised fulfilment of the said conditions, namely:
(a) Conditions of restriction of floor area of 20000 square meters in construction development projects have been removed;
(b) Investee company’s obligation to bring in a minimum of USD 5 million within 6 months of commencement of the project has been done away with;
(c) For projects under the automatic route, a foreign investor will be permitted to exit and repatriate the foreign investment before the completion of the project, provided that the lock-in requirement of three years is complied with;
(d) Transfer of stake from one non-resident to another non-resident on a non-repatriation basis will not be subject to any lock-in period or to any government approval;
3. Single Brand Retail Trading (SBRT): As per the Reforms, the 30% sourcing rule would be triggered only after the first store is set up (and not immediately post receipt of foreign investment). For ‘state-of-art’ and ‘cutting-edge technology’, sourcing norms may be relaxed with Government approval. Further, SBRT can now be undertaken through e-commerce platform.
4. Wholesale and Retail without Government Approval: As per the Reforms, Indian manufacturers with foreign investment would be allowed to sell their products through wholesale and/or retail formats, including through e-commerce platform, without Government approval. However, for this purpose, the manufacturer is required to be the owner of the Indian brand and manufacture at least 70% of its products (in terms of value) in-house, i.e. in India, and source at most 30% from Indian manufacturers. It is pertinent to mention herein that the requirement of sourcing 30% from Indian manufacturers is a new concept introduced by the government.
5. Defence Sector:
The Reforms have introduced the following changes:
(a) Foreign investment up to 49% will be under automatic route;
(b) proposals for foreign investment in excess of 49% will be considered by Foreign Investment Promotion Board (FIPB);
(c) in case of infusion of fresh foreign investment within the permitted automatic route level, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, Government approval will be required.
6. Banking Sector: The Government has decided to introduce full fungibility of foreign investment in the private banking sector. Accordingly, FIIs/FPIs/QFIs can now invest up to sectoral limit of 74% after following the due procedure, provided that there is no change of control and management of the investee company.
7. Single entity to carry out both Wholesale and SBRT: As per the Reforms, it has now been decided that a single entity will be permitted to undertake both the activities of single brand retail trading and wholesale with the condition that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by both the business arms separately.
8. Companies without Operations: Government approval is not required for infusion of foreign investment into an Indian company which does not have any operations and any downstream investments, for undertaking activities which are under automatic route and which have no FDI-linked performance conditions, regardless of the amount or extent of foreign investment.
9. Transfer of Ownership and Control of Indian Companies: Currently, the FDI Policy provides that approval of the Government will be required for establishment and ownership or control of an Indian company in sectors/activities with caps. However, as per the Reforms, this provision has been amended to provide that approval of the Government will be required if the company concerned is operating in sectors/ activities which are under Government approval route rather than capped sectors. Further, no approval of the Government is required for investment in automatic route sectors by way of swap of shares.
Overall, we believe the aforesaid Reforms are a dynamic step to integrate the Indian market with the rest of the world for attracting investments, technology, and enhancing India’s position destination as a destination for foreign investments.
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