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Recent Developments in Foreign Direct Investment Regime in India

By: Ramesh Vaidyanathan and Aditi Rani

India is likely to be the fastest growing economy in 2018 with growth expected to accelerate to 7.3% year as per the World Bank’s Global Economic Prospects Report, 2018.[1] On top of that, India also significantly improved its ranking in the World Bank’s Ease of Doing Business Index 2018.[2] This positive trajectory can be attributed to the Government of India’s continuing efforts to overhaul the regulatory regime and introduce legislative changes to improve the business environment. In the words of India’s popular Prime Minister, the economic reforms should be founded on the principles of ‘minimum government, maximum governance’ and ‘red carpet instead of red tape’.

In this article, we have attempted to cover some of the key changes proposed in respect of the Foreign Direct Investment (FDI) Policy, 2017[3]. Given below is a brief update on these two recent developments:

Liberalization of FDI Policy in key sectors

With FDI inflows at an all-time high of USD 60.08 billion in the financial year 2016-17, further relaxation of the FDI policy is intended to attract enhanced foreign investment and eliminate the delay involved in seeking approvals. The key announcements are as follows:

1. Single Brand Retail Trading (SBRT)

100% FDI has been permitted in SBRT through the automatic route (without any prior government approval), easing the regulatory process for Indian and international brands to leverage the large and growing retail industry in India. Under the earlier policy, FDI upto only 49% permitted under the automatic route. FDI beyond 49% required approval from the Government of India. Further, the mandatory local sourcing requirement of 30% has been relaxed for a period of 5 years and foreign retailers shall get credit for incremental increase in local Indian sourcing for global operations. After the completion of the 5 year period, the Indian operations of the SBRT entity must meet the 30% sourcing norm every year

2. Civil Aviation

In preparation for the privatisation of the national carrier, Air India, foreign airlines have been allowed to invest up to 49% in Air India under the approval route subject to (a) the total foreign investment in Air India not exceeding 49%; and (b) substantial ownership and control being vested in an Indian national.

3. Real Estate Broking Services

‘Real estate broking services’ has been clarified to be different from ‘real estate business’ and eligible for 100% FDI under the automatic route. This has provided much-needed clarity to international brokerage companies for future investments in Indian counterparts and also for setting up their own subsidiaries here.

4. Issues of shares for non-cash consideration and investment in Indian holding companies

Issue of shares against non-cash considerations such as pre-incorporation expenses, import of machinery, etc. shall be permitted under the automatic route in the case of sectors under the automatic route. This will give companies flexibility in their arrangements with investors. Earlier, government approval was needed for issuance of shares against pre-incorporation and pre-operative expenses.

Again, previously, foreign investment upto 100% in Indian holding companies (an Indian company engaged only in the business of investing in the capital of other Indian companies) needed prior government approval. From now on, if the concerned activities are regulated by a financial sector regulator, foreign investment up to 100% under the automatic route shall be permitted.

5. Prohibition of restrictive conditions regarding audit firms

Where the foreign investor nominates an audit firm having an international network to act for the Indian investee company, the audit of such investee company should be carried out as a joint audit where one of the auditors would not be a part of the same network. This is expected to create opportunities for Indian audit firms as the international network firm may not agree to a joint audit with its global rival’s counterpart in India.

The pivotal focus of all these major reforms is the simplification of the legal and regulatory system to make it business friendly and attract the much needed foreign investment to aid its economic growth. These measures are expected to further boost investor confidence and make India even more attractive for international investments.

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