Policy easing: A cracking start needs a strong finish

By Vaibhav Kakkar and D Preethika, Luthra & Luthra
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India’s inflow of foreign direct investment (FDI) rose to US$55.46 billion in 2015-16 from US$36.04 billion in 2013-14 due to radical liberalization by the current government.

Vaibhav Kakkar Partner Luthra & Luthra
Vaibhav Kakkar
Partner
Luthra & Luthra

Efficient and swift decision making has replaced policy paralysis, leading to a slew of FDI reforms. These include: moving about seven sectors from the approval to the automatic route; removing sectoral caps in about 10 sectors; recognizing only two levels of caps (49% and 100%, barring in two sectors); introducing full fungibility between direct and portfolio investments for reckoning compliance with sectoral caps; allowing FDI in multi-brand retailing of food products manufactured in India; introducing significant reforms in the construction development sector; and allowing investment in real estate and infrastructure investment trusts and alternative investment funds.

Further, the marketplace model for e-commerce has been recognized under the guidelines issued by the Department of Industrial Policy and Promotion (DIPP). In the pharmaceutical sector – one of the largest recipients of FDI – a foreign investor can now acquire up to 74% of the equity of a brownfield pharmaceutical company, without prior approval by the Foreign Investment Promotion Board (FIPB). Also particularly noteworthy is permitting 100% FDI in the defence sector, in certain cases, with 49% under the automatic route.

But while the FDI policy easing is an important first step, it is equally important to ensure that the reforms are implemented in their true spirit. In this area, a few glitches remain.

For example, the launch of the eBiz portal providing integrated services is a step in the right direction. However, a user of the portal faces practical issues while submitting an FIPB application. For instance, certain documents must be uploaded in order for the forms to be successfully submitted, even if the documents are not applicable in a given factual matrix. For foreign investment proposals, authorities insist on a certificate showing the fair value of the company, even in cases where a company is yet to be incorporated! Further, the number of matters taken up by the FIPB in each of its meetings has decreased and the processing time of the applications has increased.

D Preethika Associate Luthra & Luthra
D Preethika
Associate
Luthra & Luthra

It has recently been observed that where the liberalization measures are unambiguous and are clearly articulated in the FDI policy, the FIPB has been forthcoming in implementing the policy. However, in cases where the policy leaves scope for ambiguity and the language employed in the policy gives rise to more than one interpretation, the officials, for fear of being questioned, seem cautious and almost unwilling to apply constructive interpretations, even if these are squarely in line with the intended spirit and objectives of the policy.

For instance, a fresh FIPB approval is not required for investment of additional funds in a wholly owned subsidiary in a sector under the approval route, so long as FIPB approval was obtained at the time of the initial foreign investment. However, the authorities have been insisting on a fresh approval and, in some cases, even compliance with sectoral conditions, if the proposed amount is in excess of the initial amount approved by the FIPB.

A prime example of the authorities’ reluctance to adopt a liberal and constructive view is in relation to Apple’s request for approval to open its own stores. This required that the authorities interpret the term “state-of-the-art” technology, in the context of the relaxation sought by Apple from the 30% sourcing rule.

In the medical devices sector, the DIPP had in 2015 allowed 100% FDI under the automatic route in the manufacturing of medical devices, because the Drugs and Cosmetics (Amendment) Bill, 2013, distinguished “medical devices” from “drugs”. However, it appears that the Ministry of Finance has directed that the FDI policy in this sector be reconsidered, given that the bill has been withdrawn (and consequently medical devices continue to be regarded as drugs), even though the liberalization in the FDI policy was not intended to depend on this bill.

Such regulatory uncertainty depletes foreign investor confidence in the Indian markets.

For complete results to be achieved, it is important that the mindset of the implementing authorities change, to keep in pace with the incremental liberalization adopted by the government. There is no doubt that the current government has done a commendable job of liberalizing the policy framework. However, it must be remembered that it is implementation that tests the rigour of the policy design. Steps should be taken at the ground level to address the procedural/practical issues arising from the FDI policy and then the government can rest on its laurels.

Vaibhav Kakkar is a partner and D Preethika 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.

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