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Changes to the FDI Policy – A New Lease of Life to the Indian Economy

India opened up its economy in 1991 and has since considerably eased foreign direct investment (FDI) norms across various sectors of the economy, with a viewpoint of liberalizing the FDI regime in the country. Fast forward to 2019 and the current government, in order to further boost the economy and FDI inflows, has approved certain amendments to the existing FDI policy (“FDI Policy“) of the country.

The finance minister, Nirmala Sitharaman in her first budget of the new government, had put forth a proposal to relax the local sourcing norms for FDI in single-brand retail trade. Following through on this proposal, the Union Cabinet, on 28 August, 2019, approved the proposal for review of FDI in the following sectors (i) single brand retail trade; (ii) contract manufacturing; (iii) digital media (i.e. uploading/ streaming of News & Current Affairs); and (iv) coal mining.

With a plunge in the consumer sentiment in India, which has seen a continuous downward movement since May 2019 (barring a marginal improvement in July 2019)[1] and growing concerns of a global economic slowdown, these amendments have been the latest amongst a series of steps taken by the central government towards making India a more attractive foreign investment destination.

The amendments to the FDI Policy (“2019 Amendment“), announced on 28 August 2019, were notified by the Department for the Promotion of Industry and Internal Trade (“DPIIT“) vide Press Note 4 of 2019 dated 18 September, 2019[2].

  1. Single Brand Retail Trade (“SBRT“)

Perhaps the most significant amendment has been to foreign investment in SBRT. Earlier on January 23, 2018, the government vide Press Note 1 of 2018[3], scrapped the requirement for government approval for investment over 49% in SBRT and permitted 100% FDI under the automatic route in SBRT.

Further easing FDI norms, Press Note 4 notified two significant changes: (i) diluting the stringent condition of local sourcing for SBRT and (ii) granting entities undertaking SBRT, permission to conduct retail trading through e-commerce, prior to establishment of brick and mortar stores.

Local Sourcing Norms Requirement

Prior to the 2019 Amendment, the FDI Policy for SBRT provided for 30% local sourcing where the FDI exceeds 51%.These local sourcing requirements could be met as an average during the first 5 years, and thereafter annually towards its India operations. Additionally, the FDI Policy provided that to satisfy the local sourcing requirement, procurement for global operations could be undertaken by the SBRT entity only either directly or through their group companies. Further, only that part of the global sourcing was counted towards satisfaction of the local sourcing requirement which was over and above the previous year’s value i.e. only “incremental sourcing” of goods from India and not the entire sourcing was to be counted to determine fulfillment of the local sourcing requirement.The 2019 Amendment provides that:

  • All the procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported and the same would apply even beyond initial five years;
  • Aligning the amended FDI Policy with prevalent business models which involve sourcing by entities not only by the entity itself or its group companies, but also through an unrelated third party, the 2019 Amendment decided that procurement from India for global operations may now be undertaken also by an unrelated third party, done on behalf of the SBRT entity or its group companies under a legally tenable agreement; and
  • The entire (and not the incremental) sourcing from India for global operations of the SBRT entity shall be considered towards local sourcing requirement.

Brick and Mortar Store Requirement

The FDI Policy required that an SBRT entity set up and operate a physical brick and mortar store before it could undertake any retail trading of its brand through e-commerce. This restriction was ditched by the 2019 Amendment for not being in sync with current market practices. The 2019 Amendment permits an SBRT entity to undertake retail trading of its brand through e-commerce prior to the opening of brick and mortar stores, subject to the condition that the entity opens brick and mortar stores within 2 years from date of commencement of any online retail operations.

Market Impact and Response towards SBRT

Single brand retailers have for long been advocating for a more relaxed FDI climate and the response received from such retailers has been uplifting in this global economic gloom. While thanking the government following the changes to the FDI norms governing SBRT, Apple also announced that they look forward to launching the first Apple retail store in India. Ikea praised the government’s efforts and committed to further increase local sourcing from the country. The India Cellular & Electronics Association (ICEA) acknowledged the change in the rules stating that it will usher in significant growth of handset demand and better customer experience. The change may lead to more foreign retail brands setting up stores in India and making their appearance online for the India market.

  1. Amendments to Other Sectors

Contract Manufacturing

The FDI Policy provided for 100% FDI under the automatic route in the manufacturing sector with no specific mention of contract manufacturing. The 2019 Amendment clarifies that manufacturing activities may be either self-manufacturing by the investee entity or contract manufacturing in India through a legally tenable contract, whether on principal to principal or principal to agent basis, thereby permitting 100% FDI in contract manufacturing under the automatic route. Further, a manufacturer is permitted to sell its products manufactured in India through wholesale and/ or retail, including through e-commerce, without Government approval.

Digital Media

The 2019 Amendment has introduced a new sub-clause under the Broadcasting Content Services Sector which allows for 26% FDI under the government route for uploading/ streaming of ‘News & Current Affairs’through digital media. However, the term ‘Digital Media’ has not been defined by the 2019 Amendment. The FDI policy prior to the 2019 Amendment allowed for 49% FDI under the government route for entities running TV channels for up-linking of ‘News & Current Affairs’ and made no mention of digital media. Experts in the industry are of the opinion that this distinction that the 2019 Amendment makes between uploading ‘News & Current Affairs’ through TV channels and digital media will require several digital news companies to rethink their strategy for India especially digital news companies that have already raised more than 26% FDI.

Coal Mining

The FDI Policy provided 100% FDI under the automatic route for coal & lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities permitted under and subject to applicable laws and regulations. Further, 100% FDI under the automatic route was also permitted for setting up coal processing plants like washeries subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

The 2019 Amendment permits 100% FDI under the automatic route for sale of coal, for coal mining activities including associated processing infrastructure subject to provisions of Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development And Regulation) Act, 1957 as amended from time to time, and other relevant acts on the subject. “Associated Processing Infrastructure” includes coal washery, crushing, coal handling, and separation (magnetic and non-magnetic).

CONCLUSION

FDI into India has declined by 11% to USD 22.66 billion during the April-September period of 2018-2019[4]. Overall, the 2019 Amendment seems to be a positive step towards reviving the economy and increasing customer confidence through foreign investment, while at the same time focusing on the government’s Make in India policy.The impact that the 2019 Amendment can potentially have on attracting FDI will need to be examined.

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