India’s government on 10 November 2015 announced significant reforms to further rationalize and simplify the process of foreign direct investment (FDI), putting more FDI proposals under the automatic route and increasing the sectoral caps. The FDI policy was later amended in line with the announcements, via Press Note 12 of 2015.
Some of the biggest changes are in the construction development sector. While 100% FDI under the automatic route was permitted in completed projects for the operation and management of townships, malls/shopping complexes and business centres, it was unclear whether foreign investors could enjoy ownership rights in such completed projects. Under the FDI reforms, real estate developers can sell their completed projects to foreign investors. This will give the developers an opportunity to monetize and ease their heavily leveraged balance sheets and will allow foreign investors to invest in completed projects where there is no execution risk and to enjoy rental income. This will also provide the banking sector with better possibilities for repayment of outstanding debts. Additionally, the dispensation and easing of requirements in relation to minimum area and capitalization will significantly expand the number of projects eligible to receive FDI, thereby boosting the inflow of FDI.
Another key change, which becomes apparent only on a careful review of the FDI reforms, is that as a general rule, for sectors with FDI caps of 26% (except for the print media sector) and 74% (except for the banking sector), the cap of has been raised to 49% and 100% respectively. This is a welcome move as the earlier restrictive measures limited the inflow of foreign investment and a cap of 26% served no purpose, since investors holding less than 50% could enjoy the same set of governance rights, while a sectoral cap of 74% was meaningless unless the remaining 26% was held by one Indian group.
This reform is illustrated by the increase in the FDI cap to 100% (under the automatic route) from the previous overall sectoral limit of 74% for broadcasting carriage services, non-scheduled air transport service, ground handling services, satellites establishment and operation, and credit information. Similarly, the overall investment limit in broadcasting content services, i.e. terrestrial broadcasting FM and up-linking of news and current affairs TV channels, has been raised from 26% to 49% (under the approval route). Additionally, sectors such as plantations and limited liability partnerships (operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions) have been brought under the automatic route.
Another important reform is the introduction of full fungibility of foreign investment in private sector banks within the overall limit of 74%, provided that there is no change of control and management of the bank. This will help the banks raise foreign institutional capital from Indian markets. Similarly, in the defence sector the separate cap of 24% for portfolio investment has been removed within the overall automatic route limit of 49%, which will ease the flow of capital particularly for certain listed companies in the defence sector.
Apart from the above key reforms, incremental reforms have been introduced in sectors such as single-brand retail trading. The same entity is now permitted to undertake both single-brand retail and wholesale trading subject to each business arm complying with the conditions for such trading separately. This is a welcome move, as not allowing retailers with foreign investment to undertake wholesale trading posed multiple challenges and was without any clear rationale.
Also, certain unnecessary and misplaced conditions imposed on Indian companies owning Indian brands and undertaking single-brand retail trading have been relaxed and made inapplicable for FDI in Indian brands. The changes remove impediments and allow Indian brands ease of access to foreign capital, facilitating business growth. Further, the stipulation in the FDI policy that 30% of the value of goods purchased for single-brand retail trading must be from India in respect of proposals involving FDI beyond 51% has been relaxed in certain high technology segments, subject to government approval. This will aid companies operating in areas driven by premium technology and will help foreign players to set up a direct presence in India for retail distribution. Media reports suggest that Apple has already filed an application in the wake of this relaxation.
Despite the above enunciated reforms, the road to realization of increased foreign investments in India is still long. Further clarity on several open issues such as the nature of rights that may amount to “control” and the e-commerce policy is much needed. Additionally, while several policy impediments have been removed, a lot must be done at the ground level. That said, the FDI reforms are undoubtedly laudable and steps in the right direction. The reforms will give a fillip to the foreign investment climate in India, which is needed for realization of growth and development targets.
Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. Sundeep Dudeja is a partner and Avisha Gupta is an associate at the firm. The views of the authors are personal. This article is intended for general informational purposes only and is not a substitute for legal advice.