Monday, 23 November 2015

Diwali Bonanza by the Government: Red Carpet for Foreign Investors


The government of India, on the eve of Diwali, announced foreign direct investment (FDI) related reforms in 15 sectors. The proposed reforms have come in background of major political setback which the NDA led government faced in Bihar and are seen as a statement by the government that irrespective of such setbacks, the government will continue on its path of development. The reforms aim to rationalize and simplify the foreign investment and provide a strong sign of development to the foreign investors.

A formal official notification for the proposed changes is awaited and desirable as the present changes need clarity.  

Construction Development Sector

The real estate sector has been facing slowdown for 3-4 years now and to revive the sector the Government has done away with the requirement of minimum built up area of 20,000 square meters of the target project and minimum capitalization of USD 5 million.

Further, government has relaxed the conditions of exit in as much as for an investor to exit, it will have to either service a lock in period of 3 years or may exit once the trunk infrastructure (road, water supply, drainage etc) are completed. However, in case where the exit is by way of transfer of shares from a non resident to a non resident, without involving any remittance from out of India, the above conditions will also not apply.

One of the prohibited activities for foreign investment has been real estate business, which has been defined to mean dealing in land and immovable property with a view to earning profit without any development. It has been further clarified that earning of rent/income on lease of property not amounting to transfer will not amount to real estate business.

It is however not clear as to whether a company owning developed properties whose gross revenue only consists of rental from the properties will be able to accept foreign investment, since the same does not fall within the definition of 'construction projects' although the same has been removed from the definition of 'real estate business'.

Further, 100% foreign investment has been allowed in companies involved in management and operation of townships, malls, shopping complexes and business centres. In such cases, the foreign investor may assume control of the investee company subject to a lock in period of 3 years and provided the property is not transferred for a lock in period of 3 years. 

Defense Sector

Currently, foreign investment up to 49% is allowed in the Defence Sector under the approval route with a sublimit of 24% for portfolio investment and investment by foreign venture capital investors (“FVCIs”). Further, approval of the Cabinet Committee on Security is required to go beyond 49%.
With government expecting a flurry of development in the defense sector, the government has permitted foreign investment up to 49% under automatic route without any sublimit for portfolio investment and investment by FVCIs i.e. portfolio investment and investment by FVCIs will be allowed up to permitted automatic route level of 49%. Further, in the case the foreign investment is in excess of 49%, the same will be considered by Foreign Investment Promotion Board (“FIPB”).

The reforms in the defense sector are a welcome move. The defense sector is anyways subject to industrial license under the Industries (Development & Regulation) Act, 1951. Obtaining the said license is itself a robust and time consuming process. Further, the requirement of obtaining FIPB approval, for investments up to 49%, was an additional step to be complied with. With the liberalization of the sector, for investment up to 49%, no prior approval of FIPB would be required and thus resulting in reduction of an additional step, providing administrative ease to the investors.

Private Sector Banking

Similar to the defense sector, in private sector banking FDI up to 74% is permitted (49% under automatic route and approval route beyond 49% and up to 74%) with a sublimit of 49% for portfolio investment. The government has now permitted full fungibility for foreign investment in private banks i.e. no sub limits for portfolio investments.      

The reforms have been embraced by the private sector banks which had already exhausted the limit of maximum 49% investment by FPI’s. The banks were forced to look into alternate ways of raising funds. However, with the reforms, such private sector banks will have headroom to substantially increase FPI holdings.  

Retail and E-commerce

It has been clarified that a manufacturer in India will be permitted to sell its product through wholesale or retain, including through e-commerce, without any approvals.

Although merely a clarification, it poses a question as to whether a manufacturer having foreign investment will itself have to own and operate an e-commerce website or it can do through its subsidiary/group company also. 

The extant FDI policy on companies involved in single brand retail trading mandates that in case the foreign investment is beyond 51%, sourcing of 30% of the value of goods purchased would be done from India and reckoned from the date of receipt of FDI i.e. beginning 1st April of the year during which the first tranche of FDI is received. The government has now specified that the aforesaid sourcing shall be reckoned from the opening of the first store. Further, for ‘state-of-art’ and ‘cutting-edge technology’, sourcing norms may be relaxed with government approval.

The government has also permitted the entities, which have permission to undertake single brand retail trading, to undertake retail activity through e-commerce.

Further, under the extant FDI policy, products are required to be sold under the same brand internationally and non-resident entities are permitted to undertake single brand retail trading either as owner of the brand or legally tenable agreement with the brand owner. The government has now clarified that the said requirements will not be applicable in case of FDI in Indian brands.

Under the extant FDI policy a wholesale/cash & carry trader cannot open retail shops to sell to the consumer directly. The government has now permitted a single entity to undertake both the activities of single brand retail trading and wholesale cash and carry trading provided that conditions/requirements under the FDI policy with respect to wholesale cash & carry trading and single brand retail trading are complied with separately.

FDI in LLPs

For limited liability partnership entities engaged in sectors where foreign investment is permitted under automatic route and without any conditions, no prior government approval is now required for accepting foreign investment. Similar reform has been extended for downstream investment by LLPs into a company or LLP.

Companies owned and controlled by Non Resident Indians (“NRI”)

Pursuant to press note 7 of 2015, dated June 3, 2015, investments made by NRIs on non-repatriation basis were to be treated at par with domestic investments made by residents.

Pursuant to the reforms, the special dispensation is extended to companies, trusts and partnership firms, which are incorporated outside India but are owned and controlled by NRI’s.  Such entities owned and controlled by NRIs will be treated at par with NRI’s for investment in India and by virtue of press note 7 of 2015, it may be stated that this will also be treated at par with domestic investments by residents.

Other major changes

(A) 100% FDI, under automatic route, has been allowed in tea / coffee / rubber / cardamom / palm oil & olive oil plantations;
(B) Infusion of foreign investment into an Indian company which does not have any operations and any downstream investments will not require any approval, for undertaking activities which are under automatic route and which have no FDI-linked performance conditions, regardless of the amount or extent of foreign investment.
(C) Currently, FIPB considers proposals having total foreign equity inflow up to Rs. 3000 crore and proposals above Rs. 3000 crore are considered by Cabinet Committee on Economic Affairs. In order to achieve faster approvals on most of the proposals, it has been decided that the threshold limit for FIPB approval may be increased to Rs.5000 crore.

The changes seem to be in line with the ‘Make in India’ initiative launched by the government and, overall, are pulsating and will help India to enhance its position as favourable investment destination. While, the detailed press note is still awaited, it is expected that the aforesaid reforms should result in flurry of investments especially in Construction Development Sector, Defence Sector, Private Sector Banking and Single Brand Retail Trading. It is however to be mentioned that the changes seem to have been made in a haste and need lot of clarity to ensure the compliance and certainty.  



   

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