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India – FDI Policy Relaxed.

25 September, 2012 

 

Legal News & Analysis – Asia Pacific – India – International Trade

 

The Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Government of India (“DIPP”) issued five Press Notes on September 20, 2012, to give effect to the Government of India’s (“GoI”) recent decision to relax foreign direct investment (“FDI”) in various sectors. We provide below, in brief, the key amendments effected by the Press Notes to the FDI Policy of India ("FDI Policy"):

 

Single Brand Retail Trading – The GoI had earlier permitted 100% FDI in single brand retail trading subject to certain restrictive conditions and riders, which were proving to be a deterrent for the brands wanting to enter the Indian retail segment. Given the industry's lukewarm response thereto, GoI has finally relaxed some of the rather restrictive conditions and introduced new conditions as well:

 

  • The Foreign Investor Need Not be the Owner of the Brand: The erstwhile FDI Policy required the foreign investor to be the owner of the brand. The amended FDI Policy has relaxed this condition and permitted licensees, sub-licensees or franchises having legally tenable agreements with the brand owner, to invest in Indian companies undertaking single brand retailing. Interestingly, only one non-resident entity (whether owner of the brand or a licensee, sub-licensee or franchisee) has been permitted to undertake single brand product retail trading in India for that specific brand, thereby necessitating exclusivity of relationship between brand owner and the authorized entity. In case the investor is not the owner of the brand, it has to provide evidence of its contractual arrangement with the brand owner at the time of seeking approval for the FDI.

 

  • Mandatory Sourcing Condition: As per the erstwhile FDI Policy, Indian companies engaged in single brand retail trading, with FDI beyond 51% were required to mandatorily source at least 30% of the value of the products sold, from Indian ‘small industries/village and cottage industries, artisans and craftsmen’. 'Small industries' were defined as industries with total investment in plant and machinery (at the time of investment and without providing for depreciation) not exceeding USD 1 million.

 

The mandatory sourcing condition has been relaxed on three counts. Firstly, instead of 30% of the value of the products sold, the mandatory sourcing requirement now applies to 30% of the value of the goods purchased. Secondly, the source base from which such domestic sourcing has to be carried out has been widened to include medium enterprises as well (which would be defined in terms of the Micro, Small and Medium Enterprises Development Act, 2006. Thirdly, the domestic sourcing requirement has to be complied with, in the first instance, as an average of 5 years’ total value of the goods purchased, beginning April 1 of the year during which the first tranche of the FDI is received. Thereafter, the procurement requirement has to be complied with on an annual basis.

 

  • Prohibition on Retail Trading through E-commerce: A new condition has been introduced proscribing Indian companies engaged in single brand retail trading with FDI from engaging in retail trading through e-commerce.

 

Multi Brand Retail Trading – DIPP has issued Press Note 5 permitting FDI up to 51% in multi brand retail trading in all products, under prior approval route, subject to compliance with, inter alia, the following conditions:

 

  • Minimum Investment: Minimum investment by the foreign investor has to be USD 100 million;

 

  • Investment in ‘Back-end Infrastructure’: At least 50% of the total investment has to be necessarily invested in ‘back-end infrastructure’ within 3 years of receipt of first tranche of FDI. The term ‘back-end infrastructure’ has been inclusively defined as capital expenditure on all activities except front-end units, investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce, infrastructure, etc. Expenditure on front-end units, land cost and rentals will not be counted for the purposes of back-end infrastructure;

 

  • Mandatory Sourcing Condition: At least 30% of the value of manufactured/processed products purchased has to be sourced from Indian ‘small industries’, i.e., industries with total investment in plant and machinery not exceeding USD 1 million (at the time of installation and without providing for depreciation). In the first instance, the procurement requirement has to be complied with as an average of 5 years’ total value of the manufactured/processed products purchased, beginning April 1 of the year during which the first tranche of the FDI is received. Thereafter, the procurement requirement has to be complied with on an annual basis;

 

  • Minimum Population Requirement for Opening Retail Stores: Retail sales outlets may be opened only in cities with a population of more than one million as per 2011 Census. In States/Union Territories not having cities with population exceeding one million as per 2011 Census, retail sales outlets may be set up in cities of choice (preferably the largest city). In both the abovementioned cases, retail outlets may also be set up within an area of 10 kilometers around the municipal/urban agglomeration limits of such cities. All retail outlets must conform to the Master/Zonal Plans of the concerned cities and applicable State/Union Territory laws/regulations. Further, transport connectivity/parking faculties have to be made available.

 

  • Final Decision to be made by State Government/Union Territories: The State Governments/Union Territories have been given liberty to decide on implementation of the provisions of the FDI Policy with respect to multi brand retail trade in their respective State/Union Territory. Accordingly, companies engaged in multi brand retail trade and having FDI may set up retail sales outlets only in such States/Union Territories which have agreed to permit FDI in multi brand retail trade. Presently, Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand, Daman & Diu and Dadra and Nagar Haveli have agreed to FDI in multi brand retail trade; and

 

  • Prohibition on Retail Trading through E-commerce: Indian companies engaged in multi brand retail trading with FDI are proscribed from engaging in multi brand retail trading through e-commerce.

 

Civil Aviation Sector – Press Note 6 has been issued to give effect to the GoI’s decision to permit FDI by foreign airlines up to 49%, with prior GoI approval, in Indian companies operating scheduled and non-scheduled air transport services. Such FDI by foreign airlines in scheduled and non-scheduled air transport services companies has been permitted subject to the following conditions:

 

  • The 49% limit will subsume FDI and FII (Foreign Institutional Investor) investment;

 

  • The investments will need to comply with the relevant Securities and Exchange Board of India (“SEBI”) Regulations, including Issue of Capital and Disclosure Requirements Regulations, Substantial Acquisition of Shares and Takeover Regulations, etc.;

 

  • Scheduled operator’s permit will be granted only to a company:

 

  • that is registered and has its principal place of business in India;
  • whose Chairman and at least 2/3rd Directors are citizens of India; and
  • whose substantial ownership and effective control is vested with Indian nationals.

 

  • All foreign nationals likely to be associated with the Indian company engaged in scheduled and non-scheduled air transport services, as a result of investment, will require security clearance prior to their deployment in India; and

 

  • All technical equipment being imported into India shall require clearance from the Ministry of Civil Aviation.

 

Broadcasting Sector – Press Note 7 has been issued to amend the FDI Policy of India with respect to the broadcasting sector. In terms of the amended FDI Policy, FDI limit for investment in teleports (setting up up-linking HUBs/Teleports); Direct to Home (DTH); Cable Networks (MSOs operating at National or State or District level and undertaking up gradation of networks towards digitalization and addressability) has been increased from 49% to 74%. FDI up to 49% is permitted under automatic route and beyond 49% and up to 74% has been permitted under the GoI approval route.

 

Further, FDI in Mobile TV sector has also been permitted up to 74% with a condition that FDI up to 49% may be made under automatic route and beyond 49% but up to 74% will require prior GoI approval.

 

Foreign investment in broadcasting sector may be made, subject to, inter alia, the following conditions:

 

  • Foreign investment in companies engaged in broadcasting services will be subject to relevant regulations and such terms and conditions, as may be specified from time to time, by the Ministry of Information and Broadcasting;

 

  • Majority of directors on the Board of Directors of the Indian company engaged in broadcasting carriage services should be Indian citizens and the Chief Executive Officer, Chief Officer In-charge of technical network operations and Chief Security Officer should be resident Indian Citizens; and

 

  • Appropriate security clearances will be required for key management personnel of the investee company, shareholders holding more than 10% or more in the paid up capital of the company and all foreign personnel proposed to be deployed for more than 60 days. In certain cases, permission of the Ministry of Information and Broadcasting for appointment of key executives including directors may be required.

 

Power Exchange – DIPP vide Press Note 8 has amended the FDI Policy to give effect to GoI’s decision to permit foreign investment up to 49% in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010, subject to, inter alia, the following conditions:

 

  • The 49% limit is subject to FDI limit of 26% and FII limit of 23% of the paid-up capital of the investee company;

 

  • FII investments have been permitted under automatic route whereas FDI will requires prior GoI approval;

 

  • FII purchases have been restricted to secondary market only;

 

  • No non-resident investor/entity, including persons acting in concert, can hold more than 5% of the equity of the investee company; and

 

  • Foreign investment will have to be in compliance with the applicable laws and regulations, including SEBI Regulations, and security and other conditions.  

 

 

For further information, please contact:

 

Chanda Sheemar, LexCounsel
csheemar@lexcounsel.in
 
Dhruv Manchanda, LexCounsel
dmanchanda@lexcounsel.in
 

International Trade Law Firms in India 

 

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