The Indian government has recently released a press statement (the “Press Release”) which sets out a number of amendments to India’s foreign direct investment (“FDI”) regime (the “2016 Reforms”). The 2016 Reforms impact nine sectors ranging from retail to security, and are in line with a wider plan to liberalise conditions for FDI flowing into India in order to ‘attract and promote foreign direct investment in order to supplement domestic capital, technology and skills for accelerated economic growth’. The 2016 Reforms are the second round of FDI liberalisation, following on from the November 2015 measures which aimed to decrease regulatory hurdles for FDI by reducing restrictions in a range of areas such as defence, real estate, banking and construction.
We set out in this update a summary of the changes. For a table setting out the current FDI limits in the relevant sectors, please click here.
THE REGULATORY ENVIRONMENT
The principal rule in India is that non-resident entities may invest in the country (subject to FDI policy), except in sectors or activities which are ‘prohibited’. Indian FDI policy differentiates between the ‘automatic route’ under which foreign investors do not require prior approval from the government and the Reserve Bank of India (“RBI”) in order to invest in an Indian company (the “Automatic Route”) and the ‘government route’ under which foreign investors are required to seek the government’s prior approval, which is considered by the Foreign Investment Promotion Board (the “FIPB”) (and the Department of Economic Affairs and Ministry of Finance), before investing in an Indian company (the “Government Route”).
THE PRESS RELEASE
The 2016 Reforms increase the number of areas under the Automatic Route, increase a number of limits on the percentage of foreign ownership and ease the conditions which apply to FDI in nine sectors.
Liberalisation of the regulatory environment:
Pursuant to the 2016 Reforms, 100% FDI will be permitted under the Government Route for trade in food products manufactured or produced in India (“Food Products”). This also applies to e-commerce based trade in Food Products.
100% FDI is currently permitted under the Automatic Route in greenfield pharmaceuticals and 100% under the Government Route in brownfield pharmaceuticals. The 2016 Reforms amend the requirement for brownfield pharmaceuticals such that up to 74% FDI will be permitted under the Automatic Route.
For investment in airports, the current policy permits 100% FDI under the Automatic Route for greenfield projects. For brownfield projects, FDI up to 74% is permitted under the Automatic Route and FDI of between 75% and 100% is permitted under the Government Route. Under the 2016 Reforms, 100% FDI under the Automatic Route will now be permitted for brownfield projects, in an effort to modernise existing airports and improve standards. This is likely to ease some of the pressure on India’s airports, improving India’s infrastructure for travel and tourism.
The current 49% limit on FDI under the Automatic Route for scheduled and regional air transport services and domestic scheduled passenger airlines will remain, and FDI of 50% and above will be permitted under the Government Route.
For broadcasting carriage services such as direct to home broadcasting (“DTH”), cable networks and mobile TV, 49% FDI is currently permitted under the Automatic Route and FDI of 50% and above is permitted under the Government Route. Pursuant to the 2016 Reform, 100% FDI will be allowed under the Automatic Route.
In the defence sector (which is strictly regulated and requires investors to obtain additional licences prior to investing), FDI of up to 49% is permitted under the Automatic Route and FDI of 50% and above is permitted under the less stringent Government Route on a ‘case by case basis’ where such investment is ‘likely to result in access to modern and ‘state-of-art’ technology’ (the “SOA Condition”). The 2016 Reforms retain the FDI limit of 50% and above under the Government Route, but amend the condition to consider cases which result in ‘access to modern technology in the country or for other reasons to be recorded’, removing the SOA Condition. This improves the clarity of the regulations for foreign investors.
FDI limits in the defence sector have also been broadened in terms of scope, with the manufacture of certain small arms and ammunitions also now falling within the FDI rules. Whilst the efforts made in 2015 to stimulate foreign investment in the defence sector have thus far had a relatively minor impact, it is clear that improving investment in this sector is a priority.
FDI of up to 49% is now permitted under the Automatic Route for private security agencies and FDI of between 50% and 74% will be permitted under the Government Route.
Reduction of hurdles and conditions
Establishment of branch, liaison and project offices
Previously, foreign entities were only permitted to establish a branch or liaison office in India if they had prior approval of the RBI. In some circumstances, including where the principal business of the branch or liaison office is within a sector where 100% FDI is not permitted under the Automatic Route, and where foreign NGOs and government bodies apply to establish a branch or liaison office, applications would be considered by both the RBI and the Ministry of Finance. The 2016 Reforms streamline these requirements, allowing a foreign entity seeking to establish a place of business in India (where the principal business of the applicant is defence, telecom, private security or information and broadcasting) to dispense with the need to apply for other approvals where approval of the FIPB or other relevant regulator has already been obtained.
Single-brand retail trading
For single-brand retail trading, the restriction on FDI of up to 49% under the Automatic Route and 50% and above under the Government Route continues to apply. Under the 2016 Reforms however, local sourcing norms (which require foreign investors investing in excess of 51% to source 30% of the value of their goods from India) are to be relaxed by up to three years and, for entities using ‘state-of-art’ and ‘cutting edge’ technology, these norms have been relaxed for another five years (presumably from the date of the investment, but this remains unclear from the 2016 Reforms). It has been suggested that this reform will increase the ease by which global brands will be able to gain access to the Indian market.
In the animal husbandry sector, 100% FDI under the Automatic Route is currently permitted, subject to a number of ‘controlled conditions’ which involve specific areas such as the rearing of animals under intensive farming systems. The 2016 Reforms remove the ‘controlled conditions’, making FDI in the sector less complex and potentially opening it up a great deal.
The liberalisation brought about by the 2016 Reform is likely to continue the momentum gained by previous reform efforts and will further increase the ease by which foreign entities are able to invest in India. The reforms show the government’s motivation to increase investment in technology, such as in the single-brand retail sector and the defence sector, and to ease the current position for foreign investors in terms of meeting the FDI limits and complying with conditions.
For a table setting out the current FDI limits in the relevant sectors, please click here.
Co-contributed by Jessica Morris.