FDI in digital media – easing of norms or restriction?

By Vivek Pareek and Shreshth Bhartia, L&L Partners
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Last year the government, in order to boost the flagging economy, announced policy changes to foreign direct investment (FDI) under which investment norms were relaxed in certain sectors. The announcement was followed up by a press note detailing the amendments to the consolidated FDI policy (press note). The changes liberalized sectors such as coal mining and contract manufacturing, and also introduced investor friendly policies such as easing of local sourcing norms for single brand retail trading. However, one change that raised more questions than provided answers was the decision to introduce and allow 26% FDI in uploading and streaming of news and current affairs through digital media under the government approval route.

digital media
Vivek Pareek
Partner designate
L&L Partners

Before the press note was issued, the media sector was broadly categorized under two heads, that is broadcasting and print media. Investment caps were set at 49% for up-linking of news and current affairs television channels and at 26% for publishing of newspapers and periodicals dealing with the same matters, under the government approval route. The previous FDI policy was silent so far as digital media was concerned. Since digital media operates over the internet, content may be hosted and uploaded on a website from any part of the world and accessed locally. The online nature of the sector allowed an argument to be raised that 100% FDI was permitted under the automatic route as the sector was not regulated. Consequently, many creator-led and aggregator-led digital news platforms raised foreign capital in excess of the limit prescribed in the press note, and now worry that they already have FDI in excess of the 26% cap. Established media entities with foreign investment at 49% that offer news on television, also carry digital news articles and news streams. It remains to be seen whether such entities will be required to restructure their digital media properties as separate entities with foreign investment at 26%.

digital media
Shreshth Bhartia
Associate
L&L Partners

Another ambiguity is whether the FDI cap of 26% is applicable to aggregator-led news platforms and intermediaries. Typically, aggregator-led news platforms and intermediaries do not create original content but act as a service, which either compiles news articles or packages them in a summary or capsule form. An analogy can be drawn between aggregators and intermediaries and broadcast carriage service providers, which allows for an argument that the FDI limit for aggregators and intermediaries should be the same as broadcast service providers that are not content creators.

It will be interesting to see how the uploading and streaming of news and current affairs through digital media is finally defined by the government and what will be the impact on news aggregators, intermediaries and digital-only news platforms wholly owned by foreign entities. Owners may change the existing holding structure and business models of such digital only news platforms and may look for domestic investors and strategic partners to scale up and maintain a local presence. Such entities could also consider licensing-based business models where the ownership is transferred to local players. However, existing players will likely find it challenging either to unwind or to modify the existing structures, especially those wholly owned by foreign entities.

While the press note has given rise to uncertainties regarding foreign investment in the digital media sector, what is certain is the desire of the government to regulate news content. Several stakeholders and industry players have raised their concerns over the ambiguities with the Department for Promotion of Industry and Internal Trade (DPIIT). DPIIT has sought the views of the Ministry of Information and Broadcasting and is expected to issue a clarification soon.

Though the government’s efforts to bolster economic growth and create an investor friendly environment are reflected in these liberalized FDI norms coupled with ambitious initiatives such as Start-up India and Digital India, the FDI cap on digital media being equated to print media may be viewed as restricting rather than easing the norms. As many players in the digital media space are startups the FDI cap of 26% may be considered a setback to India’s emerging digital media industry and inconsistent with the Start-up India and Digital India campaigns. As the previous FDI regime in digital media was perceived as allowing 100% under the automatic route, the introduction of the 26% cap may be seen as a restriction and not as liberalization. It is likely to impact FDI adversely. While the DPIIT is expected to issue a timely clarification on these issues, it remains to be seen how the government will address these issues and provide regulatory certainty and predictability to industry players.

Vivek Pareek is a partner designate and Shreshth Bhartia is an associate at L&L Partners. The views of the authors are personal.

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