MAJOR SECTOR SPECIFIC CHANGES IN FDI – Foreign Direct Investment (India)

INTRODUCTION

(Posted Jan., 2016) Apart from being a critical driver of economic growth, foreign direct investment (“FDI”) is a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of cheaper wages, special investment privileges like tax exemptions, etc.

The Indian government’s policy regime and a robust business environment have ensured that foreign capital keep flowing into the country. The Narendra Modi led government has taken many initiatives in relaxing FDI norms across various sectors, a brief overview of which has been discussed herein below.

MAJOR SECTOR SPECIFIC CHANGES IN FDI POLICY, 2015

• FDI in Pharmaceuticals: Under the new FDI Policy, Department of Industrial Policy and Promotion has carved out medical devices out of the pharma sector and permitted FDI in the medical devices segment up to 100% under the automatic route. Medical devices and pharmaceuticals were being treated similarly under the previous FDI policy, even though the two industries are considered different from each other. The new FDI policy acknowledges this difference and provides for 100% FDI in medical devices separately from pharmaceuticals. As a result, the conditions applicable to the pharmaceuticals sector would not be applicable to the medical devices industry.
• FDI in Insurance: The government has increased the cap of FDI inflow into the insurance sector from 26% to 49%. Foreign investment would be under the automatic route up to 26% and under the government route for any investment above 26% up to 49%. The cap of 49% shall include direct and indirect foreign direct investment as well as foreign portfolio investment. The mechanism for calculation of indirect foreign investment continues to remain the same.
• FDI in Pension Sector: The new FDI policy permits foreign investment in the pension sector up to 49% as against the previous limit of 26%. FDI up to 26% will be allowed under the automatic route whereas FDI beyond 26% and up to 49% will be subject to the approval of the Foreign Investment Promotion Board (“FIPB”).
• FDI in Railways: Under the new FDI policy, the list of ‘prohibited sectors’ has been revised to replace ‘railway transport’ with ‘railway operations’, thus permitting foreign investment in ‘railway transport’ under the automatic route.
• FDI in Construction Development Sector: The conditions imposed in the previous FDI policy that now stand deleted:
• minimum area to be developed in case of construction development projects of floor area of 20,000 sq.mts.
• minimum capitalization of USD 5 million to be brought in within six months of commencement of business.

       Changes implemented in the new FDI policy:   

• Earning of rent/ income on lease of property, not amounting to transfer not to be regarded as real estate business.
• 100% FDI under automatic route permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres.
• Foreign investor permitted to exit/repatriate income before project completion subject to a lock-in of 3 years.

FDI in Banking- Private Sector: Full fungibility of foreign investment and Foreign Institutional Investors/Foreign Portfolio Investors/Qualified Foreign Investors can invest up to 74% provided there is no change in control and management of the investee company.

• FDI in Plantation Sector: As per the previous FDI policy, only tea plantation was open to foreign investment. Under the new FDI policy the government has decided to open certain other plantation activities namely; coffee, rubber, cardamom, palm oil and olive oil tree plantations and therefore allowed 100% foreign investment under the automatic route.
• FDI in Wholesale Trading / Cash & Carry Wholesale Trading Sector: Under the new FDI policy, it would be permissible for a single entity to undertake activities of both, wholesale trading and Single Brand Retail Trading, with the condition that FDI policy conditions on wholesale/ cash & carry and Single Brand Retail Trading have to be complied with by both the business arms separately.
• FDI in Civil Aviation Sector: Under the new FDI policy:
• Regional Air Transport Service will be eligible for foreign investment up to 49% under automatic route. 
• Foreign Equity caps of Non-Scheduled Air Transport Service, and Ground Handling Services have now been increased from 74% to 100%.
• FDI in Satellites- Establishment and Operation: Under the new FDI policy, foreign equity cap for satellites– establishment and operation has now been increased from 74% to 100%. 
• FDI in Credit Information Companies: Under the new FDI policy, foreign equity cap for Credit Information Companies has now been increased from 74% to 100%. 

THRESHOLD LIMIT FOR APPROVAL BY FIPB 

• Proposals up to Rs.5,000 crore to be decided by the FIPB instead of Rs 3,000 crore. Proposals beyond Rs.5,000 crore to be decided by the Cabinet Committee on Economic Affairs.
• FDI in Defense Sector: The new FDI policy permits foreign and portfolio investment up to 49% under automatic route as against the limit of 49% under government route and portfolio investment which was restricted to 24%. Proposals beyond 49% to be considered by FIPB and not Cabinet Committee on Security.
• FDI in Broadcasting: The new FDI policy has seen the following changes:
• In broadcasting carriage services, 100% FDI is permitted.
• In broadcasting content services- 49% permissible under Government route in case of terrestrial broadcasting FM (FM radio), up-linking of ‘news and current affairs’ TV channels and up to 100% permissible under automatic route in case of up-linking of non-news and current affairs TV channels and down-linking of TV channels.
• FDI in Single Brand Retail Trading and Duty Free Shops: The changes that have been implemented in the new FDI policy:
• 30% sourcing norms relaxed for high-tech segments by government route.
• e-commerce for approved single brand retail trading entities allowed.
• Indian brands need to comply to conditions including products to be sold under the same brand internationally and investment by non-resident entity as brand owner.
• 100% FDI is permissible under automatic route in Duty-free Shops located and operated in the Customs bonded areas.

CONCLUSION

The recent modifications made in the FDI policy 2015 are a clear indication that the government intends to make India an investor friendly location and attract more foreign investment. The above amendments to the FDI Policy are meant to liberalise and simplify the policy so as to provide ease of doing business in India leading to larger FDI inflows contributing to growth of investment, incomes and employment. It is also evident from the World Bank’s report where India ranks 130 out of 189 countries in the ease of doing business, moving up 12 places from last year’s ranking.

For the detailed changes in the FDI policy, please click here: DIPP website.

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