Saturday, October 1, 2011

Revised FDI Policy

It is that time of the year when the Government conducts its bi-annual review of the policy on foreign direct investment (FDI). Consistent with the previous trend over the last couple of years, it yesterday announced the Consolidated FDI Policy in the form of Circular No. 2 of 2011, which comes into effect from October 1, 2011.

The key changes announced are as follows:

1. Construction development activities: The education sector and old-age homes are exempted from the conditions that apply to construction-development activities in the real estate sector. These conditions include minimum built-up area, minimum capitalization and lock-in. 

2. Agriculture: Apiculture (bee-keeping) has been allowed under the category of permitted agricultural activities under controlled conditions.

3. Industrial Parks: Basic and applied R&D on bio-technology, pharmaceutical sciences/ life sciences has been allowed as ‘industrial activity’ for purpose of establishing industrial parks, where FDI is allowed up to 100% under the automatic route.

4. FM Radio: FDI has been increased from 20% to 26%.

5. Conversion of Advances into Equity: In case of conversion of imported capital goods/machinery and pre-operative/pre-incorporation expenses into equity instruments (which was permitted effective April 1, 2011), the application to the FIPB must be made within 180 days from the date of shipment of capital goods/machinery or retention of advance against equity.
6. Pledge/Escrow: Resident investors can pledge their shares in an Indian company against external commercial borrowings (ECB) raised by such company from foreign lenders. Moreover, several procedural aspects of equity investment have been eased: these include the ability of foreign investors to open escrow accounts towards payment of share consideration and for keeping securities to facilitate FDI transactions. 

Compared to the last round of changes in April 2011, the new policy appears to be lacklustre with largely incremental advancements and clarifications. It is devoid of any material changes in any sector that is of significance in the overall development of the economy. Although there was great momentum a few weeks ago towards liberalisation of the multibrand retail sector, and consequent anticipation of policy announcements, it appears to have slowed down lately.


Anonymous said...

Hi it also does away with call/put options on equity. I guess this just formalises what RBI has been doing all along!


V. Umakanth said...

@Menaka. Thanks for highlighting this important change. I have included a short comment at

Anonymous said...

Investment into LLPs has been allowed. See paragraph 3.2.5.