The Government of India has recently issued notifications allowing 51 percent Foreign Direct Investment (“FDI”) in multi-brand retail trading (“MBRT”), besides reforming FDI norms in other vital sectors. In this alert, we have briefly summarized the recent FDI changes notified by the Government.
i. FDI allowed in MBRT
The present policy prohibits FDI in retail trading except in single-brand retail trading (“SBRT”). The Cabinet in its meeting on November 24, 2011 while allowing 100 percent FDI in SBRT also approved 51 percent FDI in
MBRT but, the move being met by stiff political resistance, the Government was compelled to defer the proposal subject to broader consensus on the subject.
Pursuant to discussions with State Governments, consumer associations and other interested groups, FDI in MBRT, in all products, has now been notified subject to the following primary conditions:
· Sales outlets to be set up in the consenting States, subject to applicable State regulations, and only in cities with population of more than 1 million as per 2011 census (including area of 10 kms around the municipal limits of such cities). In case of States/ Union Territories with no such cities, outlets may be opened as per choice of the State, preferably the largest city (including area of 10 kms around the municipal limits thereof). As of now, ten States/ Union Territories[1] have consented to the policy.
· Minimum FDI of USD 100 million to be brought in and at least 50 percent of total FDI to be invested in ‘backend infrastructure’ within the timeframe of three years of infusion of FDI. ‘Backend infrastructure’ will include capital investment towards processing, manufacturing, distribution, logistics, quality control, etc but will not include expenditure on front-end units and expenditure on land cost and rentals.
· At least 30 percent of the procurement of manufactured/ processed products purchased to be sourced from Indian ‘small industries’ having total investment in plant and machinery not exceeding USD 1 million; valuation at the time of investment (excluding depreciation) to be referred to and where the valuation exceeds the stipulated limit at any point of time, the industry will stand disqualified. This condition would have to be met in the first instance basis average of five years beginning the year during which first FDI tranche is received and thereafter, to be met on an annual basis.
· Fresh agricultural produce, including fruits, vegetables, flowers, meat products etc may be unbranded and Government will have the first right to procurement of agricultural products.
· Retail trading by means of e-commerce would not be permissible for companies with FDI engaged in the activity of MBRT.
ii. Liberalization of conditions for FDI in SBRT
The present policy permits 100 percent FDI in SBRT under the Government approval route subject to the stipulated conditions. Aimed at further liberalizing the sector, the Government has approved the following modifications to the conditions.
Existing condition
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Amended condition
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Foreign investor should be the owner of the brand.
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Only one non-resident entity (whether brand owner or otherwise) shall be permitted to undertake SBRT in India for the specific brand, through a legally tenable agreement with the brand owner.
The onus of ensuring such compliance shall rest with the Indian entity carrying out SBRT. Further, the license/ franchise agreement to be furnished by the investing entity while seeking approval.
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In case of FDI beyond 51 percent, mandatory sourcing of 30 percent of the value of products sold to be done from Indian small industries/ village, cottage industries, artisans and craftsmen.
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In case of FDI beyond 51 percent, sourcing of value of 30 percent of the value of the goods purchased to be done from India, preferably from SMEs, village, cottage industries, artisans and craftsmen, in all sectors. This condition would have to be met in the first instance basis average of five years beginning the year during which first FDI tranche is received and thereafter, to be met on an annual basis.
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Further, it has been stipulated that retail trading by means of e-commerce would not be permissible for companies with FDI engaged in the activity of SBRT.
iii. FDI by foreign airlines allowed in air transport services
The present FDI policy allows foreign airlines to invest in companies operating cargo airlines, helicopter and seaplane services, but debars them from participating, directly or indirectly, in the equity of an air transport undertaking engaged in operating scheduled and non-scheduled air transport services.
To provide a boost to the sector, the Government has approved investment by foreign airlines upto 49 percent (including FDI and FII investment) in Indian companies operating scheduled and non-scheduled air transport services. The investment shall be subject to Government approval, relevant SEBI regulations and the following conditions:
· A company will be granted a Scheduled Operator’s Permit provided:
- It is registered in India and has its principal place of business within India;
- Chairman and at least two-third of the Directors to be Indian citizens; and
- Substantial ownership and effective control vests in Indian nationals.
· Foreign nationals, likely to be associated with air transport services, shall be cleared from security view point before deployment.
· Technical equipment to be imported into India shall require clearance from the relevant authority in the Ministry of Civil Aviation.
iv. FDI allowed in Power Trading Exchanges
Under the present policy, there is no specific dispensation for FDI in power trading exchanges. The Government has approved FDI in such exchanges upto 49 percent (with FDI limit of 26 percent and FII limit of 23 (percent). While FII would be allowed under automatic route, FDI would be permitted under the Government approval route. Further, such investments shall be subject to SEBI regulations and other applicable laws and conditionalities, including the following:
· FII investments shall be restricted to secondary market only.
· No non-resident investor/ entity, including persons in concert, shall hold more than 5 percent of the equity in such companies
v. Liberalizing FDI policy in broadcasting sector
Under the present policy, FDI in Teleports, Direct to Home and Cable Networks sectors are permitted upto 49 percent under the Government approval route. The Government has approved enhancing the cap to 74 percent, with investment up to 49 percent permitted under automatic route and investment beyond 49 percent permitted under the Government approval route.
Further, under present policy, there is no specific dispensation for Mobile TV. The Government has approved FDI upto 74 percent in Mobile TV, with investment up to 49 percent permitted under automatic route and investment beyond 49 percent permitted under the Government approval route, subject to specified conditionalities and guidelines.
Besides, in line with policy in the telecom sector, methodology for calculation of direct investment has been approved to be uniform across various activities in the broadcasting sector and shall include, in addition to FDI, investment by FIIs, NRIs, FCCBs, ADRs, GDRs and convertible preference shares held by foreign entities. Also, certain security conditions/ terms have been stipulated for FDI in broadcasting carriage services.
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