Searching for answers in new FDI proposal

By Vineetha MG and Srabonee Roy, Samvad Partners
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On 28 August 2019 the government announced its new proposal on Foreign Direct Investment (FDI). While the announcement has been made, the fine print of the proposed changes to the existing FDI policy has still to be revealed and the government will need to make certain policy and regulatory changes to support the ease of doing business in sectors affected by the changes. The following are the key points in the proposal.

The government has proposed to allow 100% of FDI under the automatic route (without prior government approval) in contract manufacturing (under legally tenable contracts). This is aimed at clarifying the position that contract manufacturing will not amount to trading activity and therefore, will not be subject to existing policy on FDI for trading activities. Manufacturers in sectors like pharmaceutical, textiles, electronic goods, and so on are expected to benefit from this proposal.

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Vineetha MG
Partner
Samvad Partners

100% of FDI is to be permitted under the automatic route in the sale of coal and coal mining activities, including associated processing infrastructure (including coal washery, crushing, coal handling, and magnetic & non-magnetic separation) subject to the provisions of relevant acts governing the sector. The government is hopeful this will create an efficient and competitive coal market in India, reduce dependency on the import of coal and bring to India advanced and sustainable coal mining technologies. While this may attract interest from international players, they would expect a certain ease and transparency to be brought to the processes involved in doing business in this sector. This may require the government to consider streamlining the processes for obtaining environmental clearances, mining leases, allocation and auction of mines, land acquisition, and so on. Under the existing FDI policy of India, 100% of FDI under the automatic route is allowed for coal & lignite mining for captive consumption by power projects, iron & steel and cement units and the setting up of coal processing plants like washeries, subject to restrictions on coal mining and the sale of washed coal or sized coal from such coal processing plants in the open market and a requirement to supply the washed or sized coal only to those parties who supply raw coal to coal processing plants for washing or sizing.

FDI
Srabonee Roy
Partners
Samvad Partners

Further, 26% of FDI under the approval route (with prior government approval) is to be permitted for uploading and streaming of news and current affairs through digital media. No clarity has been given on what constitute digital media. Thus, the proposal could be viewed as a reduction from the 100% of FDI limit under the existing policy. News today is disseminated through TV channels (in which 49% of FDI under the approval route is currently permitted) and by streaming through mobile applications and websites (and in most cases by the same entities). It is not clear how the new proposal will apply to such entities.

Furthermore, the impact of the proposal on news aggregators and platforms, or on the likes of Dailyhunt, Google News, Inshorts, and so on, is also not clear. Currently, the proposal does not reveal how the government plans to track the origin of content and its dissemination through digital media. With all these ambiguities clouding the FDI proposal in this sector, the media industry has already reached out to the government to obtain clarity.

The sourcing obligations of single brand retail trading (SBRT) entities having more than 51% of FDI under the existing policy has been proposed to be eased. All procurements made from India by the SBRT entity for that single brand is proposed to be counted towards its sourcing obligations, irrespective of whether such goods are sold in India or exported.

The entire sourcing from India for global operation by SBRT entities is proposed to be considered towards its sourcing obligation. SBRT entities can fulfil this obligation by themselves or through their group companies (resident or non-resident) or through third parties under legally tenable agreements. Further, the existing cap of considering exports for only five years towards the sourcing obligation is proposed to be removed. SBRT entities will now be permitted to undertake retail trade through online channels two years prior to opening bricks and mortar stores in India. International retail players such as Apple, Ikea, H&M, and so on. are expected to benefit from this.

One will have to wait for the fine print of the proposed changes to the FDI policy to fully understand the impact, and whether it will put India on the global map as a favoured FDI destination. As they say, the devil is always in the detail.

Vineetha MG and Srabonee Roy are partners at Samvad Partners.

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