Recent FDI reforms in India
Foreign funding is important to bridge the huge fund
gap of investment in infrastructure in India, which in turn will spur economic
growth. According to a recent report, the inflow of foreign direct investment
(“FDI”) was US $ 28 billion in 2013, an increase of 17% over the previous year.
The services sector attracted the highest FDI inflows in FY14 with US$ 2.25
billion, followed by the construction & development and telecommunication
industries, but this is still a drop in the ocean.
on the recommendations of the Foreign Investment Promotion Board (“FIPB”) in
its meeting held on 4th July, 2014, the Indian Government has approved 14
proposals of FDI, several in the pharmaceutical sector, amounting to Rs.
1528.38 crores. The Cabinet has recently announced increase in the sectoral
caps in defense and is doing its utmost to increase the cap on insurance to
49%. This year, the government has announced a slew of policy reforms besides
introducing certain new and amended definitions.
and group company
concept of the term ‘control’ has been broadened. Earlier, the parameter for
determining “control” was “the power to
appoint a majority of directors in a company. The definition of “control” is now inclusive
and “includes the right to appoint
a majority of the directors or to control the management or policy decisions
including by virtue of their shareholding or management rights or shareholders
agreements or voting agreement” bringing it closer, if not exactly in line
with, the Companies Act, 2013 and the Takeover Code.
phrase ‘Group company’ has been newly added to the extant FDI policy of India
(“FDI Policy”) and means “two or more
enterprises which, directly or indirectly, are in a position to (i) exercise
twenty-six percent or more of voting rights in other enterprises; or (ii)
appoint more than fifty percent of members of board of directors in the other
in sectoral caps
sectoral caps in important sectors under the FDI Policy have been revisited and
some of them currently stand as in the following paragraphs.
FDI up to 100% is permitted in Pharma
but through automatic route only in
cases of greenfield investment or a new venture and through the government
approval route in cases of brownfield or existing companies. The government has
decided not to permit ‘non-compete clauses’ in the agreements to be entered
into by foreign investors with Indian entities, except in special circumstances
with the prior approval of the FIPB. Additionally, the FDI Policy stipulates submission of a certificate by the
prospective investor and the prospective investee (a brownfield entity) to the
FIPB, providing a complete list of all agreements entered into between such
investor and investee.
up to 49% has been permitted in the defence sector under the government approval route with control and ownership in
Indian hands. Approvals even beyond 49% will be permitted on a case to case
basis, wherever it is likely to result in access to modern and ‘state-of-art’
technology in the country. Foreign investment limit is composite and includes
FDI, foreign institutional investors (“FII”), foreign portfolio investors
(“FPI”), non-resident Indians, Qualified Foreign Investors and Foreign Venture
Capital Investors. Portfolio investment is under the automatic route and total
of all such non strategic foreign investment is capped at 24% cumulatively.
FDI in this crucial sector has been enchanced
up to 100% with 49% under the automatic
route beyond which prior approval of the government will be required, subject
to observance of licensing and security conditions by licensee as well as
investors as notified by the Department of Telecommunications from time to
time, except “Other Service Providers”, which are allowed 100% FDI on the
Single brand product
up to 100% under the government route was permitted earlier in this sector. The
cap has been revised and now FDI up to 49% is permitted under the automatic
route beyond which prior approval of the government will be required.
Multi-brand retail trading
The government has announced its in principle
opposition to foreign investment in
multi-brand retail trading but has not vetoed the earlier policy of the
previous government in this sector.
The earlier condition requiring at least 50% of total FDI brought in to be
invested in 'backend infrastructure' of the company receiving FDI within three
years of receiving the first tranche of FDI has been modified and now at least
50% of total FDI brought in the first tranche of US $ 100 million is to be
invested in 'back-end infrastructure' within three years. Subsequent investment
in backend infrastructure would be made by the multi-brand retail trading
retailer on a need basis depending upon its business requirements.
Mandatory sourcing - The other significant change in this
sector addresses the issue of minimum mandatory sourcing requirement. Under the
erstwhile regime, companies with FDI in this sector were required to source at
least 30% of the value of procurement of the manufactured or processed products
from ‘small industries’ that have a total investment of not more than USD 1
million in plant and machinery. The aforesaid requirement has been revised with
respect to the limit of total investment by ‘small industries’ in plant and
machinery, which has now been increased to a maximum of USD 2 million.
is the most recently opened sector under the FDI Policy and in terms of the
revised FDI Policy, 100% FDI in the automatic route has been permitted in
several segments of railway infrastructure including high speed train projects,
dedicated freight lines, railway electrification, signaling systems and
passenger terminals. FDI
in these activities open to private sector participation including FDI is
subject to sectoral guidelines of Ministry of Railways and proposals involving
FDI beyond 49% in sensitive areas from security point of view, will be brought
by the Ministry of Railways before the Cabinet Committee on Security (CCS) for
consideration on a case to case basis.
earlier onerous condition of compulsory divestment by the foreign investor of
26 per cent equity of the company in favour of the Indian partner or Indian
public within a period of 5 years has been dispensed with.
in the test marketing industry was permitted up to 100% under the government
route. Recently, FDI in this sector has been brought under the automatic
route and the very sectoral cap in the FDI Policy has been done away with.
companies to raise capital and partly paid equity shares and warrants
of the other major reforms brought about in the FDI Policy include unlisted companies being allowed to raise
capital abroad through depository receipts or convertible bonds without the
requirements of the prior or subsequent listing in India, subject to certain
conditions and timelines and partly paid equity shares and warrants
issued by an Indian company in accordance with the provision of the Companies
Act, 2013 and the SEBI guidelines, as applicable, being eligible instruments
for the purposes of FDI and FPI by FIIs or Registered Foreign Portfolio
Investors, subject to compliance with FDI and FPI schemes.
Reserve Bank of India has also issued new pricing guidelines applicable on
Indian companies for providing greater freedom and flexibility to the parties
concerned under the FDI framework, wherein the fair value in respect of both
transfer and issue of shares and exit from investment will be worked out as per guidelines
different from those applicable under the earlier regime.
In case of listed
issue and transfer of shares including compulsorily convertible preference
shares and compulsorily convertible debentures shall be as per the SEBI
guidelines and the pricing guidelines for FDI instruments with optionality
clauses shall continue to be in accordance with the existing regime wherein the
non-resident investor shall be eligible to exit at the market price prevailing
on the recognised stock exchanges, subject to lock-in period as stipulated,
without any assured return.
In case of unlisted companies, the issue and transfer of shares
including compulsorily convertible preference shares and compulsorily convertible
debentures with or without optionality clauses shall be at a price worked out
as per any internationally accepted pricing methodology on arm’s length
basis. Accordingly, the guiding principle will be that the non-resident
investor is not guaranteed any assured exit price at the time of making such
investment or entering to an agreement and shall exit at a fair price
computed as above at the time of exit subject to lock-in period requirement
as applicable in terms of the existing conditions on the subject.
[The author is a Principal Associate,
Corporate Practice, Lakshmikumaran & Sridharan, New Delhi]