The Department for Promotion of Industry and Internal Trade (DPIIT) released Press Note 4 of 2019 on 18 September 2019 introducing, among other matters, changes to the policy for foreign direct investment (FDI) in contract manufacturing and single brand retail trading (SBRT). With regard to SBRT, the press note permits (a) the commencement of online retail prior to opening physical stores, provided that physical stores are opened within two years of the commencement of online retail, and (b) the inclusion of the export of locally sourced products for global operations towards the mandatory requirement for 30% local sourcing.
The press note also permits all contract manufacturing to be treated as manufacturing for the purposes of the FDI policy, for which FDI is permitted up to 100% under the automatic route, without restrictions on the mode of sale. This change is significant, given that the now abolished Foreign Investment Promotion Board did not treat contract manufacturing as manufacturing. Foreign owned players who earlier proposed to source products from contract manufacturers ran the risk of being classified as traders under the FDI policy, and of having to comply with applicable conditions for wholesale trading (B2B), SBRT or multi-brand retail trading, depending on the type of products sold and the nature of customers. Consistent with the emphasis on the Make in India policy, the press note does not extend the relaxation for contract manufacturing to goods procured from foreign contract manufacturers.
These changes are expected to benefit players such as Apple, which can now procure devices manufactured in India on a contract basis by Foxconn but yet be classified as a manufacturer, without having to comply with the conditions of SBRT. The changes under the press note pertaining to local sourcing requirements will also help Apple and other retailers like Walmart and IKEA. These developments incentivize foreign-owned retailers to procure goods from domestic manufacturers in order to meet local sourcing requirements or under contract manufacturing arrangements. This will generate more economic opportunities and employment locally. Such changes in the pattern of local sourcing could also boost exports of products to global markets, procured by foreign owned retailers for the purposes of meeting local sourcing requirements. The changes introduced by the press note therefore augur well for both foreign players and local manufacturers.
However, the omission by the Ministry of Finance (MoF) to incorporate the changes introduced by the press note in the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, which was issued on 17 October 2019 in supersession of the Foreign Exchange Management Transfer or Issue of Securities to a Person Resident Outside India Regulations, 2017 (FEMA 20R), had left stakeholders confused. Other press notes of 2018, including PN 2 of 2018 which brought investments above 49% in SBRT under the automatic route, were also omitted. The supersession was not surprising, given that the government had introduced amendments to the Foreign Exchange Management Act, 1999 (FEMA) pursuant to the Finance Act, 2015, to empower the government, instead of the Reserve Bank of India (RBI), to make rules for regulating capital account transactions not involving debt instruments, in order to avoid an overlap of responsibilities between the RBI and the government.
These omissions had however raised issues of incompatibility between the FDI Policy and FEMA. The FDI policy in paragraph 1.1.2 states that in the event of any conflict between the policy and notifications issued under FEMA, the FEMA notification will prevail. Dichotomies between FDI policy and FEMA notifications are not new. In several instances in the past, stakeholders operated on the basis of press notes, while corresponding amendments to FEMA 20R were awaited. For example, press notes 2 and 4 of 2009 relating to downstream investment were incorporated into FEMA 20R only in 2013. On these earlier occasions, the blame for the lack of synchronization could have been attributed to a lack of coordination between the RBI and the government, which is not the case anymore.
Fortunately, the MoF reacted positively to the criticism in this regard and introduced an amendment to the rules, to rectify these omissions and incorporate the press note with effect from 5 December 2019. The amendment brings about much needed clarity for foreign owned retailers and paves the way for them to restructure their operations in India accordingly.
Anshuman Mozumdar is a partner and Anirudh Gotety is an associate at L&L Partners. The article contains personal views only.
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