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India Policy Alert: Consolidated FDI Policy

By: Riya Dutta

India continues to grow faster than its large emerging market peers. The World Bank in its report on Global Economic Prospects has projected a growth rate of 7.6-7.7% for India for the fiscal year 2016-2017 to fiscal year 2018-2019[1].

Foreign Direct Investment (FDI) in India is permitted under the automatic route and the approval route. Under the automatic route, the foreign investor is permitted to invest up to 100% in an Indian company without any prior approvals. Investment under the approval route requires the prior approval of the Foreign Investment Promotion Board (FIPB). Sectoral caps may also apply in such cases. 

The Government of India released the Consolidated FDI Policy (“Policy”) last week, incorporating all policy changes effected over the last one year. The Policy has been made simpler, more investor friendly and more precise in order to facilitate the ease of doing business in India. This is sought to be accomplished by including a majority of sectors under the automatic route, relaxing sectoral investment caps and dispensing prior approval requirements to a large extent.

New aspects of the Policy

  1. Private Security Agency: The Policy has brought in clarity as to what would constitute the business of providing private security by defining the terms “Private Security Agencies”, “Private Security” and “Armoured Car Services”[2]. Foreign investors investing in private security agencies have to comply with the existing sectoral cap of 49% and go through the approval route. Foreign investment in this sector is also subject to compliance with the principal legislation regulating this business, i.e., the Private Security Agencies (Regulation) (PSAR) Act, 2005.

Consolidation of FDI announcements over the last year

  1. Asset Reconstruction Companies: FDI cap has been increased from 49% to upto 100% in this sector under the automatic route[3]. Asset reconstruction companies play a pivotal role in reducing the pile of stressed assets of banks. 100% investment in this sector will attract foreign investors and help banks reduce bad debts from their books.

  2. E-commerce: FDI upto 100% is permitted under the automatic route in respect of market place model of e-commerce[4]. However, foreign investors are not allowed to invest in inventory based e-commerce where goods and services are directly owned and sold by the e-commerce entity.

FDI in market based model of e-commerce is, however, subject to the conditions stipulated in the Policy. The e-commerce entities cannot claim ownership rights over the goods and services that are sold on their digital or electronic platforms. They can only function as facilitators between the sellers and the buyers and will therefore have no influence over the price of goods and services sold on their digital/electronic platforms.

  1. Insurance: FDI cap in the insurance sector has been raised from 26% to 49% under approval route[5].

  2. Construction: FDI up to 100% has been permitted under the automatic route in construction-development projects (which include development of townships, construction of residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, and city/regional level infrastructure)[6]. Further, each phase of the construction development project will be treated as a separate project for FDI purposes.

Regulations have been further relaxed to the extent that foreign investors are now permitted to exit and repatriate the investment on completion of the project or after development of trunk infrastructure, i.e. roads, water supply, street lighting, drainage and sewerage, after the completion of three years from the date of each tranche of foreign investment. Hotels, tourist resorts, hospitals, educational institutions have been exempted from the lock-in requirements. Earlier, the original investment amount was subject to a lock-in and could not be repatriated for a period of three years from the date of completion of minimum capitalization.

  1. Defense: The erstwhile regulation of allowing FDI in defense sector only under approval route is done away with. FDI in the defense sector has been now permitted upto 49% under the automatic route[7].

  2. Civil Aviation: Foreign investment limit for sectors such as non-scheduled air transport service, establishment and operation of satellites and credit information companies have been hiked from 74% to 100%[8]. In order to facilitate easy approval of FDI proposals, all sectors other than “Satellites-establishment and operation” have been placed under the automatic route.

Other sectors that have been significantly impacted by relaxation of sectoral caps and liberalized policy measures include banking, broadcasting, medical devices, LLPs, duty-free shops and plantations (for coffee, rubber, cardamom, etc.)[9]. This is an impetus to foreign investors to “Make in India”.

Apart from relaxing the sectoral investment caps, another liberalization measure that has been advancing the “Make in India” initiative is expanding the list of eligible capital instruments for FDI. The eligible capital instruments for FDI were earlier restricted to equity shares and fully, compulsorily and mandatorily convertible instruments. Now, investment through share warrants, partly paid shares and share swaps has also been permitted under the automatic route for sectors falling in the automatic route[10].

As evident from above, Government has been consistently introducing investor friendly reforms to attract foreign investment into India. The Government of India appears to be moving towards unshackling investment restrictions and simplifying the process for foreign investment. 












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