CHANGES IN THE FOREIGN DIRECT INVESTMENT POLICY OF 2013

CHANGES IN THE FOREIGN DIRECT INVESTMENT POLICY OF 2013

By K P C Rao.,

 LLB.,  FCMA., FCS

Practicing Company Secretary

kpcrao.india@gmail.com

“An entrepreneur wants things to happen. An opportunist waits for things to happen. The strategist makes these things happen”.

-         Reinier Geel

Background

Finance Minister Mr P. Chidambaram, while presenting the Budget this year called attention to the Current Account Deficit, caused by the fact that India imports far more than it exports thereby putting a strain on foreign exchange reserves. The Finance Minister has been making a case for foreign direct investment (FDI) into India in this context at many forums. In line with his thinking,  the Department of Industrial Policy and Promotion, Government of India (“DIPP”), has released 6th issue of Consolidated FDI Policy (Circular 1 of 2013) effective from 5th April 2013 (“FDI Policy 2013”). The FDI Policy 2013 supersedes, inter alia, the erstwhile version of the Consolidated FDI Policy (Circular 1 of 2012) dated 9th April 2012 (“Erstwhile FDI Policy”) and other press notes issued since then.

The key changes in the policy 2013

a)     Investment from Pakistan

It has been specified in the FDI Policy 2013 that a citizen of Pakistan or an entity incorporated in Pakistan can invest subject to Government Approval, in sectors/activities other than defence, space and atomic energy sectors/activities prohibited for foreign investment.

b)     FDI against import of capital goods/machinery/equipments

Under the FDI Policy 2013, the erstwhile requirement for an independent valuation of the capital goods/machinery/equipment (including second-hand machinery) by a third party entity, (preferably by an independent valuer from the country of import  along with production of copies of documents/certificates issued by the customs authorities towards assessment of the fair-value of such imports) has been removed.    

c)     Downstream investment by Banking Companies in certain case

A note has been inserted in  the FDI Policy 2013, wherein it has been prescribed that downstream investments by a banking company incorporated in India, which is owned and/or controlled by non-residents/non-resident entity(ies), under corporate debt restructuring or other loan restructuring mechanism or in trading books or for acquisition of shares due to default in loans, shall not be counted towards indirect foreign investment. It has been prescribed further that the strategic downstream investments, however, shall be counted towards indirect foreign investment. 

d)     Foreign Investment in Multi Brand Retail Trading

After prolonged discussions and debate, foreign investment in multi brand retail trading, was permitted by DIPP vide issuance of the Press Note No. 5 (2012 Series) dated 20th September 2012.  Accordingly, the list of ‘Prohibited Sectors’ under para 6.1 of the FDI Policy 2013 has been modified to omit the words “Retail Trading (except single brand product retailing)”. Further, the FDI Policy 2013 has been amended to give include detailed framework dealing with foreign investments in multi brand retail trading.

e)     Foreign Investment in teleports, Direct to Home and Mobile TV

The DIPP increased foreign investment limits in teleports and Direct to Home from 49% to 74% (wherein any investment beyond 49% to 74% would be subject to government route). Further, the said press note also permitted foreign investment in Mobile TVs up to 74% (wherein any investment beyond 49% to 74% would be subject to government route). Accordingly, a new para has been inserted (in modified form) in the FDI Policy 2013 to capture above policy amendments.

f)       Foreign Investment in Air Transport Services

The investment by foreign airlines in scheduled and non-scheduled air transport services was permitted by DIPP in the year 2012 and such investment is subject to Government Approval. Accordingly, the relavant para of the FDI Policy 2013 has been amended to include foregoing policy announcements.

g)     Single brand product retail trading

With effect from 20th September 2012, amendments were announced in the erstwhile policy governing foreign investments in ‘Single brand product retail trading’. Accordingly, it was announced that only one non-resident entities, whether owner of the brand or otherwise, 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, it was also announced that the onus for ensuring compliance with the foregoing condition shall rest with the Indian entity carrying out single brand product retail trading in India and the investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing/franchise/sub-licence agreement, specifically indicating compliance with the said conditions. It was also prescribed that in respect of proposals involving Foreign Direct Investment (“FDI”) beyond 51%, sourcing of 30% of the value of goods purchased, will be done from India, preferably from micro, small and medium enterprises (MSMEs), village and cottage industries, artisans and craftsmen, in all sectors and the quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. The said 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. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading. Accordingly, the relavant para of the FDI Policy 2013 has been amended to include the above policy changes related to investment in single brand product retail trading.

h)     Foreign Investment in Asset Reconstruction Companies

Few changes have been included to include policy announcements by Ministry of Finance in December 2012. It has been mentioned that Foreign Institutional Investors (“FIIs”) have been permitted to invest in Asset Reconstruction Companies upto 10% of the total paid-up capital. Further, FIIs limits for investing in Security Receipts have been enhanced to 74% of each tranche of scheme of such Security Receipts. It is also prescribed that such investments should be within the FII limit on corporate bonds prescribed from time to time, and sectoral caps under extant FDI regulations should also be complied with.

i)       Downstream Investments by foreign owned Non Banking Finance Companies

The DIPP in the year 2012, announced policy revisions to permit Non Banking Finance Companies (“NBFCs”) (i) having foreign investment above 75% and below 100% and (ii) with a minimum capitalisation of US$ 50 million, to 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 foregoing revisions have been included in the FDI Policy 2013.

j)       Foreign Investment in Power Exchanges

Till 20th September 2012, there was no clarity as regards the foreign investment in power exchanges and hence, the investee companies/investors used to seek clarifications on the matter. Considering the same, on 20th September 2012, the DIPP vide its Press Note No. 8 (2012 Series) announced a framework governing foreign investments in power exchanges. By virtue of the same, foreign investment upto 49% was permitted in power exchanges (inclusive of limits of 26% and 23% on FDI and FII investments respectively) to put power exchanges at par with commodity exchanges. Further, it was specified that the FII investments shall be restricted to secondary markets only and no non-resident investor (including persons acting in concert) shall hold more than 5% of the equity in power exchanges. A new para has been added in the FDI Policy 2013 to reflect above policy announcements.

Further, specific provisions dealing with conversion of companies with FDI into LLPs have also been included in the FDI Policy 2013.

Conclusion

 The route for India, from the global experience, is clear. The current account deficit can be beaten only with strong, globally competitive exports. Fortunately, compared to many of the smaller nations, India is blessed with a range of high-potential industries and a vast agricultural sector where it leads the world in many areas. Undoubtedly, India lacks a national strategy to build global competitiveness in exports. When we study the success of other nations, it is clear that they have first built their position of strength with a wilful effort. They have ensured that their respective interests are well taken care of by building export competitiveness before opening their economies to the winds of global competition. FDI is not the answer when the basic requirement of forex surpluses is not being generated. This is for the simple reason that today’s FDI sets up continuous annuity payments, or Foreign Direct Outflow, for times to come. Building exports is the only sustainable way to beat the current account deficit. Can we put the nation’s interests first and get on with this job?

The Author is a Practising Company Secretary and Visiting faculty, NALSAR University of Law, Hyderabad.