FDI Policy, 2017: Decoding ambiguities

By Dipti Lavya Swain and Srabanee Ghosh, Luthra & Luthra Law Offices
0
118

One of the prime targets in policy making has always been attracting greater foreign investment into India. Accordingly, the country’s foreign direct investment (FDI) policy has been frequently amended, as and when required. On 28 August, the Department of Industrial Policy and Promotion (DIPP) issued the Consolidated Foreign Direct Investment Policy, 2017, incorporating all amendments made to the consolidated FDI policy notified in 2016 via notifications and press notes.

In addition to consolidating the amendments, the 2017 FDI policy also brings about the following changes:

Dipti Lavya SwainPartnerLuthra & Luthra Law Offices
Dipti Lavya Swain
Partner
Luthra & Luthra Law Offices

Limited liability partnership: FDI in limited liability partnerships (LLPs) saw a change in March this year, however, certain key clarifications, which were awaited, came only in August. The FDI policy now specifically allows conversion of an LLP having FDI into a company and conversion of a company having FDI into an LLP, so long as they are under the 100% automatic route and without any FDI-linked performance conditions. Also, in a welcome development, the term “FDI-linked performance conditions”, which was used at several places in the previous policy (including for LLPs as well as non-operating companies) creating some confusion, has been defined to mean “the sector specific conditions for companies receiving foreign investment”.

Single-brand retail trading: Pursuant to Press Note 5/2016, local sourcing norms in the policy do not apply for a period of three years from the date of commencement of business, i.e. opening of the first store for entities undertaking single-brand retail trading of products having “state-of-art” and “cutting-edge” technology and where local sourcing is not possible. After this period, local sourcing norms are applicable.

The terms “state-of-art” and “cutting-edge” technology created a lot of confusion. The FDI policy now clarifies that a committee under the chairmanship of the DIPP secretary, with representatives from NITI Aayog (the National Institution for Transforming India), concerned administrative ministry staff and independent technical experts on the subject will examine the claims of applicants on the issue of the products being in the nature of “state-of-art” and “cutting-edge” technology where local sourcing is not possible and give recommendations for such relaxation. While the presence of experts on the committee is likely to bolster investor confidence, the manner in which decisions on the claims of applicants are made will be something that potential investors will be keenly watching.

Srabanee GhoshAssociateLuthra & Luthra Law Offices
Srabanee Ghosh
Associate
Luthra & Luthra Law Offices

Cash-and-carry wholesale trading: The previous policy allowed a wholesale/cash-and-carry trader to undertake single-brand retail trading subject to the conditions mentioned under FDI in the single-brand retail trading sector. The 2017 policy has deleted the references to “single brand”, hence clarifying that it will no longer be limited to single-brand trading, though compliance with stipulated conditions will continue to apply.

E-commerce: Under the previous policy, though an e-commerce entity was restricted from permitting more than 25% sales from one vendor or a vendor’s group companies through its e-commerce marketplace, the manner in which this limit was to be computed (i.e. the period of calculation, and whether the volume of sales or the value of sales is to be taken into account) was not specified. The FDI policy has cleared the ambiguity by clarifying that the limit is in respect of sales value, which is to be computed per financial year.

Downstream investment: Given the abolition of the Foreign Investment Promotion Board (FIPB), intimations in relation to downstream investment are now required to be made to the Reserve Bank of India (RBI) and the Foreign Investment Facilitation Portal, instead of the Secretariat of Industrial Assistance, DIPP and the FIPB. Given that the RBI has always been a keen watcher, such intimations are likely to be evaluated with greater scrutiny.

Additional FDI: Pursuant to the FDI policy, any additional FDI in the same entity which would result in the cumulative FDI exceeding ₹50 billion (US$765 million) would require a fresh approval, though the FDI may still be within the approved foreign equity percentage, or into a wholly owned subsidiary.

While the changes in the FDI policy appear to have clarified certain ambiguities and provided regulatory certainty, there hasn’t been much development in the FDI policy in the nature of further liberalizations. However, given the current outlook of the government towards liberalization, further amendments may be expected in the near future.

Dipti Lavya Swain is a partner and Srabanee Ghosh is an associate at Luthra & Luthra Law Offices. The views expressed here are personal. They are intended for general information purposes and are not a substitute for legal advice.

luthra & Luthra

9th Floor, Ashoka Estate

Barakhamba Road

New Delhi – 110 001

India

Contact details:

Tel: +91 11 4121 5100

Fax: +91 11 2372 3909

Email: delhi@luthra.com

Website: www.luthra.com