Steps in press note enhance India’s allure for investors

By Vaibhav Kakkar and Debarpan Ghosh, Luthra & Luthra Law Offices
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In the past, regulatory stagnancy and resistance to change, coupled with regulatory uncertainty, interpretational ambiguity, and a protectionist attitude, have hamstrung India’s efforts to project itself as a destination for foreign direct investment (FDI). Any position India held in this regard was down to strong economic and human capital fundamentals. The present administration, however, has implemented systemic changes, including streamlining approval modalities. Press Note 1 of 2018 has moved further to improve ease of doing business by removing many ambiguities and regulatory bottlenecks while simultaneously implementing conceptually novel checks and balances in the FDI policy.

Vaibhav KakkarPartnerLuthra & Luthra Law Offices
Vaibhav Kakkar
Partner
Luthra & Luthra Law Offices

A key example is the definition of “medical devices”, which was previously subject to future amendments to the Drugs and Cosmetic Act, 1940. This throwaway proviso created confusion and discouraged investments into this sector, where India is heavily import-reliant. The press note provides a clear, comprehensive definition of the term and removes all references to other laws, providing much needed (and long-pending) clarity.

The press note also clarifies that “real estate broking service” does not fall within the “real estate business” sector. Given the FDI policy’s bar on FDI in “real estate business”, the previous lack of clarity had created a fragmented and unsophisticated market for real estate broking services within India, despite the need of the hour being a healthy real estate ecosystem to serve burgeoning housing needs. This clarification will enable players in the broking sector to develop their businesses and fulfil this pressing market need.

These changes are indicative of the government’s approach in the press note, which appears to be aimed at easing and clarifying crucial points for industry players. Other key amendments in this regard include permitting FDI in Air India (a necessary step for its disinvestment) and permitting the issuance of shares for non-cash consideration under the automatic route in all instances where the sector is under the automatic route.

Debarpan GhoshAssociateLuthra & Luthra Law Offices
Debarpan Ghosh
Associate
Luthra & Luthra Law Offices

In addition to focused amendments, the press note makes certain broad-strokes revisions, reflecting a commitment to substantive FDI policy overhauls in crucial sectors. Notable here is the major revision with respect to the single-brand retail trading (SBRT) sector, whereby 100% FDI under the automatic route in the SBRT sector (up from 49% previously) has been permitted, and key relaxations to the sourcing norms provided. Through the press note, SBRT entities are now permitted to set off their sourcing requirements, for five years, against the year-on-year incremental sourcing by their global group companies. Many international retailers, waiting in the wings to make investments into India, had found it hard to comply with these norms, given their niche sourcing needs. The changes, which clearly respond to these concerns, are expected to attract major international retailers, and give a major boost to the economy.

A final, crucial aspect of the press note is its commitment, in line with broader governmental policy, to promoting accountability. In a sector-agnostic change, the press note mandates that going forward, when foreign investors specify particular auditors or audit firms, that are part of an international network, as the auditor of an Indian investee company, audits will be carried out via a joint audit mechanism in which the other auditor is not part of the same network. This novel change is clearly aimed at ensuring that relationships and arrangements at global levels do not undermine the level of scrutiny and integrity of audits carried out in Indian investees.

While the intent behind this move is commendable, some consequent implementation wrinkles must be addressed. A suitable mechanism will be required to resolve ambiguity with respect to situations where joint auditors disagree with each other’s findings. A separate concern arises from the standard business practices of investors with respect to the appointment of audit firms. As most investors specify only that audits are to be carried out by the Big 4 (or Big 5) global audit firms, concerns arise as to whether the above-mentioned stipulation will apply, given that no specific auditor or audit firm has been appointed. Given the track record of the government recently, clarity on these issues should be forthcoming.

In sum, the press note has, through a combination of minor and major amendments, continued India’s long march towards becoming a major FDI destination. Taken with past regulatory changes, the press note may have finally put India in sight of this goal.

Vaibhav Kakkar is a partner and Debarpan 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.

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