Consolidated FDI Policy, 2013: Summary of Key Changes

By Abhishek Kisku, Associate

The Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Government of India has come out with a revised Consolidated FDI Policy effective from April 5, 2013. Several key changes have been introduced during the previous financial year which has been consolidated in the new Policy.

One of the most important introductions in the present FDI Policy is the approval of FDI in Multi Brand Retailing where 51% FDI in multi brand retail sector will be allowed with government approval. However, the policy mandates the following conditions have to be fulfilled before applying to the Department of Industrial Policy & Promotion (‘DIPP’):

i.        Minimum amount of investment to be brought in by the foreign investor has to be US $ 100 Million;

ii.        At least 50% of total FDI brought in shall be invested in ‘backend Infrastructure’ within three years of the first tranche of FDI. ‘Backend Infrastructure’ has been defined as capital expenditure on all activities, excluding that on the front end units and will include expenditures made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. However, expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure;

iii.        Atleast 30% of the value of procurement of manufactured/processed products purchased shall have to be made from Indian ‘small industries’ which have a total investment in plant and machinery of not exceeding US $ 1.00 million;

iv.        Fresh agricultural products, poultry, fishery and meat products may be unbranded;

v.        The government will have the first right of procurement of agricultural products;

vi.        Self certification from the company to ensure compliance with all the requirements with respect to minimum amount of investment, investment in backend infrastructure and procurement from Indian ‘small industries’;

vii.        Retail outlets may be set up only in cities which has a population of more than 10 lakh as per the 2011 Census and it may extend to an area of 10 kms around the municipal/urban agglomeration limits of such cities. However, In States/ Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities;

viii.        The policy on FDI in multi brand retail is an enabling policy and all the states governments/ union territories will have the freedom to take their own decision in implementation of the Policy. Presently, only the following 10 states governments and union territories have agreed to implement the policy:

  1. Andhra Pradesh
  2. Assam
  3. Delhi
  4. Haryana
  5. Jammu & Kashmir
  6. Maharashtra
  7. Manipur
  8. Rajasthan
  9. Uttarakhand
  10. Daman & Diu and Dadra and Nagar Haveli (Union Territories)

ix.        Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading;

x.        Before being considered by Foreign Investment Promotion Board (FIPB) for Government approval, the application for the approval of foreign investment has to be first made to the Department of Industrial Policy & Promotion in order to determine whether the proposed investment fulfils the laid guidelines. 

Another major change which the government has introduced in this Policy is the introduction of 49% FDI in civil aviation sector through which it has permitted foreign airlines to pick 49 per cent stake in domestic carrier companies. It has allowed foreign airline companies to invest in the capital of Indian companies under the Government Approval route, operating scheduled and non-scheduled air transport services, up to the limit of 49% of their paid-up capital. However, such investment would be subject to the following conditions:

i.        It would be made under the Government approval route;

ii.        The 49% limit will subsume FDI and FII investment;

iii.        The proposed investments will have to comply with the relevant SEBI Regulations including the Issue of Capital and Disclosure Requirements (ICDR) Regulations, Substantial Acquisition of Shares and Takeovers (SAST) Regulations;

iv.        The Scheduled Operators Permit will be granted only to a company:

a. Which is registered and has its principal place of business in India;

b.The Chairman and at least two-thirds of the Directors of which are citizens of India; and

c. The substantial ownership and effective control of which is vested in Indian nationals.

v.        All foreign nationals who are likely to be associated with Indian scheduled and non-scheduled air transport services, as a result of such investment shall have to obtain clearance from security view point before deployment; and

vi.        All technical equipment that might be imported into India as a result of such investment shall require clearance from the relevant authority in the Ministry of Civil Aviation.

In order to foster the friendly relations with Pakistan and to increase the trade between the two nations, the government has introduced a significant change in the present Policy allowing Pakistan nationals and companies to invest in the country under the government approval route in sectors/activities other than defence, space and atomic energy and sectors/ activities prohibited for foreign investment.

Few policy changes for FDI Investment in single brand retailing have been introduced in the 2013 FDI Policy. As per the 2012 FDI Policy, the foreign Investor had to be the owner of the brand. However, as per the 2013 policy, only one non-resident entity, whether owner of the brand or otherwise, shall 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, the procurement requirement has also been changed in the new policy wherein now, in proposals of FDI beyond 51%, 30% of the value of the goods purchased has to be done from India, preferably from Micro, Small and Medium Enterprises (MSMEs), village and cottage industries, artisans and craftsmen, in all sectors. This procurement requirement would have to be met, in the first instance, as an average of five years total value of the goods purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis. Like Multi Brand retailing, retail trading, in any form, by means of e-commerce would not be permissible, for companies with FDI, engaged in the activity of single-brand retail trading.

In the sector of Asset Reconstruction Companies (ARCs), the ceiling limit for FDI in ARCs has been increased to 74 per cent from 49 per cent with government approval. This move has been made with the intention to bring more foreign expertise in the segment. Further conditions have been introduced which mandate that the total shareholding of an individual Foreign Institutional Investor (FII) cannot be more than 10% of the total paid up capital of an ARC. For FIIs registered with SEBI, it can invest in the Security Receipts (SRs) issued by ARCs registered with Reserve Bank and it can invest up to 74 per cent of each tranche of scheme of SRs.

In the 2013 Policy, the Government has also decided that 49% (FDI & FII) in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010 will be permitted after government approval (for FDI).

In the Broadcasting Sector, the 2013 FDI Policy has raised the FDI cap to 74% in various services such as Direct to Home services and Cable Networks (Multi System operators (MSOs) operating at National or State or District level and undertaking upgradation of networks towards digitalization and addressability). Investment upto 49% will be allowed in the automatic route whereas for investment beyond 49%, approval of the government will be required. With respect to foreign investment in the broadcasting services, the Government has introduced several security conditions and terms including i) mandatory requirements for key executives of the Company, ii) security clearance of personnel, iii) requirements related to infrastructure, network and softwares, iv) monitoring, inspection and submission of information, and v) National Security Conditions.

The 2012 FDI policy mandated that 100% foreign owned Non Banking Financial Companies (NBFCs) with a minimum capitalisation of US$ 50 million can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital. However, this policy has been changed and as per the new 2013 Policy, NBFCs having foreign investment more than 75% and up to 100%, and with a minimum capitalisation of US$ 50 million, can 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 Government of India has also tried to attract investment from Non-Resident Indians by making provisions where if an NRI is making an investment in an Indian company in compliance with the provisions of the Companies Act, 1956, by way of subscription to its Memorandum of Association, such investments may be made at face value of the shares subject to their eligibility to invest under the FDI scheme.

The 2012 FDI Policy had listed nine mandatory conditions with regard to conversion of a company with FDI into a Limited Liability Partnerships (LLPs) firm which included the following clause:-

Foreign Capital participation in LLPs will be allowed only by way of cash consideration, received by inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank.

However, in the 2013 FDI Policy, the abovementioned clause has been made optional in case of a company, thereby bringing the number of mandatory conditions to eight.

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One Response to Consolidated FDI Policy, 2013: Summary of Key Changes

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