03 February 2018

Review of FDI Policy on various sectors

Union Cabinet recently approved changes in the Foreign Direct Investment Policy (“FDI Policy”) allowing further liberalisation with a view to promote and provide ease of doing business in the country. On January 23, 2018, the Department of Industrial Policy & Promotion notified the amendments by way of Press Note No. 1 (2018 Series). These amendments will come into effect from the date of the FEMA notification in this regard.
Certain key changes proposed are as follows:


Single Brand Retail Trading:

The requirement of government approval route for FDI in this sector beyond 49% has been done away with. Now, the FDI Policy permits 100% FDI under automatic route for Single Brand Retail Trading. A single brand retail trading entity can now set off its incremental sourcing of goods from India for global operations during the initial 5 years (beginning 1st April of the year of opening of its first store), against the mandatory sourcing requirement of 30% of purchases from India. After completion of this 5 year period, the Single Brand Retail Trading entity will be required to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis. Not only will 100% FDI being permitted through the automatic route in this sector remove barriers for foreign retail traders looking to make an entry into India thus giving access to various new foreign brands to domestic consumers, but also the relaxations in sourcing norms will allow such traders/manufacturers to test the waters in Indian markets first and thus, be in a better position to source locally once they have assessed and aligned their business requirements and arrangements in India.        
In Civil Aviation, although foreign investment in the capital of Indian-operated scheduled and non-scheduled airlines was permitted under the approval route up to 49%, ‘Air India’(flagship national carrier), was not covered within the ambit of such FDI. To widen competition for investment into Air India, which is proposed to be put on the block soon as part of the disinvestment plan, the Government has also lifted the restriction barring foreign airlines from picking up stake in the national carrier. Now overseas players can acquire up to 49% stake in Air India subject to Government approval.

Earlier there was ambiguity on permissibility of FDI in companies engaged in real estate broking business. It has now been clarified that real estate broking services do not constitute real estate business and is therefore, eligible for 100% FDI under automatic route.

Previously, along with the 49% cap on FDI under automatic route in Power Exchanges, FII/FPI purchases in this sector were restricted to secondary market only. Henceforth, FIIs/FPIs have been allowed to invest in Power Exchanges through the primary market as well.


Automatic route for holding/ investment activity:

Previously, foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian companies and in Core Investing Companies was allowed up to 100% with prior Government approval. Henceforth, if such investment activities are regulated by any financial sector regulator, then FDI up to 100% will be allowed under automatic route; and if they are not regulated by any financial sector regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, FDI will be allowed under Government approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government.


Competent Authority for examining FDI proposals from countries of concern:

For investments through Automatic route requiring approval only on the matter of investment being from a country of concern, FDI applications shall be processed by Department of Industrial Policy & Promotion (DIPP), instead of the Ministry of Homes Affairs as was earlier the case. Cases under the Approval route also requiring security clearance with respect to countries of concern, will continue to be processed by concerned Administrative Department/Ministry.


Prohibition of restrictive conditions regarding audit firms:

Henceforth, if a foreign investor wishes to specify a particular auditor or audit firm having an international network for an Indian investee company, then audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network. This change in policy, while improving corporate governance standards, will boost the business prospects of local chartered accountant firms.


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