India’s Department of Industrial Policy and Promotion (DIPP) makes policy pronouncements on foreign direct investment (FDI) through press notes and press releases which are notified by the Reserve Bank of India (RBI) from time to time. These notifications take effect from the date of issue unless they specify otherwise. The procedural instructions are issued by the RBI through a series of circulars.
The press notes, press releases, clarifications, etc., together with acts and regulations, form the regulatory framework over a period of time and are consolidated by the DIPP in the form of its consolidated FDI policy, which is released once every year. The Consolidated FDI Policy, 2013, effective from 5 April, is the sixth edition of the consolidated policy. It supersedes the previous edition and notifications issued prior to 5 April 2013.
Downstream investments by banking companies: A note inserted under paragraph 184.108.40.206 prescribes that downstream investments by a banking company incorporated in India, owned and/or controlled by non-residents or non-resident entities, will not be counted towards indirect investment under corporate debt restructuring or another loan restructuring mechanism or in trading books or for acquisition of shares due to default in loans.
Downstream investments by non-banking financial companies (NBFCs): NBFCs having foreign investment above 75% and below 100% and with a minimum capitalization of US$50 million can set up step down subsidiaries for specific NBFC activities without any restriction on the number of operating subsidiaries and without bringing in additional capital (revisions in para 220.127.116.11.2).
Multi-brand retail trading: As this is now permitted, “retail trading” has been deleted from the list of “prohibited sectors” in para 6.1 and para 18.104.22.168 has been amended.
Single-brand retail trading: Only one non-resident entity is permitted to undertake retail trading for a specific brand – either the brand owner or through a legally tenable agreement with the brand owner. For proposals involving FDI beyond 51%, sourcing of 30% of the value of goods purchased must be done from India, preferably from micro, small and medium enterprises, village and cottage industries, as an average of five years’ total value of the goods purchased (para 22.214.171.124 has been amended).
Teleports, direct to home and mobile TV: The FDI limit has been increased to 74%, beyond 49% to 74% subject to government approval (para 126.96.36.199 has been inserted in modified form).
Air transport services: FDI by foreign airlines in scheduled and non-scheduled air transport services is permitted subject to government approval (para 188.8.131.52 has been amended).
Asset reconstruction companies (ARCs): The total limit for FDI and foreign institutional investment (FII) in ARCs has been increased to 74% from 49% under the government route. Earlier, persons resident outside India were not allowed to invest in ARCs through the FII mode.
Power exchanges: Up to 49% FDI is now permitted in power exchanges. FII investments are restricted to secondary markets only and no non-resident investor (including persons acting in concert) can hold more than 5% of the equity in power exchanges (para 6.2.19 has been added).
FDI against import of capital goods/machinery/ equipment: The requirement of mandatory independent valuation of the capital goods/machinery/ equipment by a third-party entity, preferably an independent valuer from the country of import, along with production of certain documents has been dispensed with (para 3.4.6).
FDI in limited liability partnership (LLPs): Where an Indian company is to be converted into a LLP, the condition of foreign capital participation to be only by way of cash consideration, received by inward remittance through normal banking channels or by debit to a non-resident external/foreign currency non-resident account of the person concerned has been dispensed with.
Issue price of shares: The requirement that shares subscribed under a company’s memorandum of association by non-residents including non-resident Indians must be priced using the discounted free cash flow method has been dispensed with. Such investment may now be made at face value subject to eligibility to invest under the FDI scheme.
Investment from Pakistan: Citizens and entities incorporated in Pakistan are now allowed to invest in the equity capital of an Indian entity after getting government approval.
As the above shows, the latest consolidated FDI policy incorporates the press notes and circulars issued since the issuance of the previous consolidated policy. Ambiguities expected to be resolved in terms of clarifications on FDI and FII limits in various sectors and lock-in periods for investments in the real estate sector remain unaddressed. However, having said that, some of the changes in relation to raising the FDI cap in various broadcasting services and ARCs, allowing FDI in multi-brand retail trading, etc., are welcome moves from the government.
OP Khaitan & Co is a 40-lawyer law firm, based in New Delhi. Gautam Khaitan is the firm’s managing partner and Gaurav Kapur is an associate.
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