Saturday, April 13, 2013

Changes in the Revised FDI Policy of 2013

[In a previous post, we had drawn attention to the Revised FDI Policy. One of the criticisms of the policy review process was that the changes were not evident from the face of the policy, thereby making it less user-friendly. Fortunately, this gap has been filled in a timely manner by one of our guest contributors below.

The following post is contributed by Parag Bhide, who is a Senior Associate at Universal Legal.]

The Department of Industrial Policy and Promotion, Government of India (“DIPP”), in pursuance of its policy of consolidating all the press releases/press notes, has released 6th issue of Consolidated FDI Policy (Circular 1 of 2013) effective from 5th April 2013 (“FDI Policy 2013”). The FDI Policy 2013 supersedes, inter alia, the erstwhile version of the Consolidated FDI Policy (Circular 1 of 2012) dated 9th April 2012 (“Erstwhile FDI Policy”) and other press notes issued since then.

The key changes brought by the FDI Policy 2013 are as under:

- Investment from Pakistan: It has been specified in para 3.1.1 of the FDI Policy 2013 that a citizen of Pakistan or an entity incorporated in Pakistan can invest subject to Government Approval[1], in sectors/activities other than defence, space and atomic energy sectors/activities prohibited for foreign investment. The above revision has been carried out in pursuance to the Press Note No. 3 (2012 Series) dated 1st August 2012.

- FDI against import of capital goods/machinery/equipments: Under para 3.4.6 of the FDI Policy 2013, the erstwhile requirement for an independent valuation of the capital goods/machinery/equipment (including second-hand machinery) by a third party entity, (preferably by an independent valuer from the country of import along with production of copies of documents/certificates issued by the customs authorities towards assessment of the fair-value of such imports) has been removed.

- Downstream investment by Banking Companies in certain case: A note has been inserted under para of the FDI Policy 2013, wherein it has been prescribed that downstream investments by a banking company[2] incorporated in India, which is owned and/or controlled by non-residents/non-resident entity(ies), under corporate debt restructuring or other loan restructuring mechanism or in trading books or for acquisition of shares due to default in loans, shall not be counted towards indirect foreign investment. It has been prescribed further that the strategic downstream investments[3], however, shall be counted towards indirect foreign investment.  The above revision has been carried out in pursuance to the Press Note No. 2 (2012 Series) dated 31st July 2012.

- Foreign Investment in Multi Brand Retail Trading: After prolonged discussions and debate, foreign investment in multi brand retail trading, was permitted by DIPP vide issuance of the Press Note No. 5 (2012 Series) dated 20th September 2012.  Accordingly, the list of ‘Prohibited Sectors’ under para 6.1 of the FDI Policy 2013 has been modified to omit the words “Retail Trading (except single brand product retailing)”. Further, para of the FDI Policy 2013 has been amended to give include detailed framework dealing with foreign investments in multi brand retail trading.

- Foreign Investment in teleports, Direct to Home and Mobile TV: The DIPP vide its Press Note No. 7 (2012 Series) dated 20th September 2012 increased foreign investment limits in teleports and Direct to Home from 49% to 74% (wherein any investment beyond 49% to 74% would be subject to government route). Further, the said press note also permitted foreign investment in Mobile TVs up to 74% (wherein any investment beyond 49% to 74% would be subject to government route). Accordingly, para has been inserted (in modified form) in the FDI Policy 2013 to capture above policy amendments.

- Foreign Investment in Air Transport Services[4]: The investment by foreign airlines in scheduled and non-scheduled air transport services was permitted by DIPP in the year 2012[5] and such investment is subject to Government Approval.[6] Accordingly, para of the FDI Policy 2013 has been amended to include foregoing policy announcements.

- Single brand product retail trading: With effect from 20th September 2012[7], amendments were announced in the erstwhile policy governing foreign investments in ‘Single brand product retail trading’. Accordingly, it was announced that only one non-resident entities, whether owner of the brand or otherwise, be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking single brand product retail trading in respect of the specific brand for which approval is being sought. Further, it was also announced that the onus for ensuring compliance with the foregoing condition shall rest with the Indian entity carrying out single brand product retail trading in India and the investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing/franchise/sub-licence agreement, specifically indicating compliance with the said conditions. It was also prescribed that in respect of proposals involving Foreign Direct Investment (“FDI”) beyond 51%, sourcing of 30% of the value of goods purchased, will be done from India, preferably from micro, small and medium enterprises (MSMEs), village and cottage industries, artisans and craftsmen, in all sectors and the quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. The said procurement requirement would have to be met, in the first instance, as an average of five years' total value of the goods purchased, beginning l " April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading. Accordingly, para of the FDI Policy 2013 has been amended to include the above policy changes related to investment in single brand product retail trading.

- Foreign Investment in Asset Reconstruction Companies: In para 6.2.17 of the FDI Policy 2013, few changes have been included to include policy announcements by Ministry of Finance in December 2012. It has been mentioned that Foreign Institutional Investors (“FIIs”) have been permitted to invest in Asset Reconstruction Companies upto 10% of the total paid-up capital. Further, FIIs limits for investing in Security Receipts have been enhanced to 74% of each tranche of scheme of such Security Receipts. It is also prescribed that such investments should be within the FII limit on corporate bonds prescribed from time to time, and sectoral caps under extant FDI regulations should also be complied with.

- Downstream Investments by foreign owned Non Banking Finance Companies: The DIPP in the year 2012[8], announced policy revisions to permit Non Banking Finance Companies (“NBFCs”) (i) having foreign investment above 75% and below 100% and (ii) with a minimum capitalisation of US$ 50 million, to set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital. The foregoing revisions have been included out in para of the FDI Policy 2013.

- Foreign Investment in Power Exchanges: Till 20th September 2012, there was no clarity as regards the foreign investment in power exchanges and hence, the investee companies/investors used to seek clarifications on the matter. Considering the same, on 20th September 2012, the DIPP vide its Press Note No. 8 (2012 Series) announced a framework governing foreign investments in power exchanges. By virtue of the same, foreign investment upto 49% was permitted in power exchanges (inclusive of limits of 26% and 23% on FDI and FII investments respectively) to put power exchanges at par with commodity exchanges. Further, it was specified that the FII investments shall be restricted to secondary markets only and no non-resident investor (including persons acting in concert) shall hold more than 5% of the equity in power exchanges. A new para 6.2.19 has been added in the FDI Policy 2013 to reflect above policy announcements.

Additionally, specific provisions dealing with conversion of companies with FDI into LLPs have also been included in the FDI Policy 2013.

Conclusion: It can be seen from the above, the changes carried out in the FDI Policy 2013 are with respect to the incorporation of the various press notes and circulars issued since the issuance of Erstwhile FDI Policy. Ambiguities expected to be resolved in terms of clarifications on FDI and FII limits in various sectors, lock-in period conditionalities for investments in real estate sector, still remain unaddressed.

- Parag Bhide

[1] Foreign Investment and Promotion Board has been designated as a nodal agency to consider such cases.
[2] As defined under section 5(c) of the Banking Regulation Act, 1949
[3] Like investments in subsidiaries, joint ventures and associates
[4] Air Transport Services includes Domestic Scheduled Passenger Airlines, Non-Scheduled Air Transport Services, helicopter and seaplane services
[5] DIPP Press Note No. 6 (2012 Series) dated 20th September 2012
[6] Ibid
[7] DIPP Press Note No. 4 (2012 Series) dated 20th September 2012
[8] DIPP Press Note No. 9 (2012 Series) dated 3rd October 2012


Rushab Dhandokia said...

Umakanth Sir,

This is with respect to the 2013 FDI policy Vis-a-Vis investments in VCF.

Sir, VCF in India can be set up either as a Trust, Company or a Body Corporate structure. Most VCFs are set up as trusts though.

However, the FDI policy states that FDI in VCF set up as Trusts are subject to approval of FIPB whereas VCF set up as Company have the benefit of the automatic route.

Why so Sir? I read here that it is easy to liquidate a VCF set up as Trust compared to one set up as company given the regulatory framework.
Is that the reason, that since Trust structures are easy to liquidate hence stricter regulations for them?

IV Year Law Student
Nirma Unversity

Umakanth Varottil said...

@Rushab. Although a trust provides greater flexibility in structuring and operations, the FDI regime tends to favour foreign investment in companies rather than in entities such as trusts and other unincorporated structures. Hence, this distinction.

Nagaraju said...

Hi Sir,

What are all the sectors FDI India prohibited?

Thanks for your help