In Hannover for the recent Indo-German summit, Prime Minister Narendra Modi reaffirmed the Indian government’s commitment to building an investment-friendly business environment by assuring investors that “India is now a changed country”. Aware that in a capital-starved economy, increased foreign investment can facilitate growth, the government has launched the “Make in India” campaign, hiked foreign direct investment (FDI) caps in the defence and insurance sectors, allowed FDI in sectors such as railways, reduced the number of filings and digitized application processes.
Press Note 1 of 2015, issued by the Department of Industrial Policy and Promotion (DIPP) on 5 January (NIC press note), seeks to bring regulatory clarity and simplify the process of doing business by aligning the FDI Policy, 2014, with the National Industrial Classification, 2008 (NIC-2008). NIC-2008 is an internationally attuned system of classifying economic activities, necessary for making various filings. This column examines the issues resolved pursuant to the DIPP mapping exercise across key sectors and ascertains the consistency of this mapping with FDI policy.
Defence: The term “defence sector”, not defined in the FDI policy, has been construed to include every activity applicable to the sector. As per the NIC press note, FDI in the defence sector (permitted up to 49% with government approval) is allowed for manufacturing heavy weapons, small arms, war ammunition, explosive devices, missiles, airplanes and helicopters, and building warships and scientific investigation ships. DIPP’s mapping usefully attempts to clarify the intention of policy makers regarding activities permitted in this sector. Additionally, DIPP’s Press Note 3 of 2014 furnished a concise list of defence items requiring an industrial licence and clarified that dual-use items, other than the defence items specifically listed, would not require a licence.
The exclusion of services and allied activities from those mapped against the defence sector arguably leads to the interpretation that such services and allied activities do not require prior approval and FDI up to 100% can be brought in without being subject to the defence cap of 49%. In the past, when clarity by virtue of such mapping was missing, we understand that Safran Aerospace India applied for approval of the Foreign Investment Promotion Board (FIPB) under the defence sector and was allowed 100% FDI for development and export of software (and allied information technology enabled services), and Eurocopter India was advised to access the automatic route for helicopter-related IT services. In both instances, FIPB approval was sought to bring in FDI, since no guidance was available on whether services and allied activities fell within the ambit of the defence sector.
Real estate business: In the face of conflicting views on whether real estate broking falls within “real estate business”, in which FDI is prohibited, the NIC press note suggests that FDI in real estate broking would be prohibited by mapping “real estate activities on a fee or contract basis”, which includes activities of real estate agents and brokers, as a description of “real estate business”.
Construction development: FDI in the construction development sector has been mapped against construction of buildings carried out on an own-account or fee contract basis. As a result, contractors engaged in pure construction activities appear to have been included within the ambit of construction development. This is clearly not the intent of the policy, which aimed at imposing conditions on entities which have an interest in the land or development. Such an overreach in the mapping could impede private equity investment in the capital-intensive construction sector.
Pharmaceuticals: The NIC press note aids in clarifying whether wholesale trading of pharmaceutical products falls in the wholesale trading sector (100% FDI under the automatic route) or in the pharmaceutical sector (where FDI in an existing company requires FIPB approval). The mapping showcases the regulatory intention to keep wholesale trading of pharmaceutical products outside the ambit of the pharmaceutical sector. Similarly, the NIC press note clarifies the intention of policy makers to exclude the manufacturing of medical devices from the pharmaceutical sector. Press Note 2 of 2015 additionally clarifies a special position for manufacturing of medical devices and equipment as free from the conditions attached to FDI in pharma.
Policy versus classification
DIPP’s mapping exercise should reassure foreign investors of the government’s commitment to increasing the ease of doing business. While law and policy will always override the NIC press note, it is a step in the right direction and aids in understanding regulatory intent. Despite the discrepancies in the mapping, the NIC press note is future oriented and will ensure a more transparent regulatory regime. Additional steps to remove any perceived grey areas could serve to accelerate growth in foreign investment.
Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. Damini Bhalla is a partner and Charu Chitwan is an associate at the firm. This article is intended for general informational purposes only and is not a substitute for legal advice.
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