Vol. 11 Issue 11.2
November 19, 2015
Progressive reforms measures rolled out to the Foreign Direct
Investment Policy
Mukesh Butani, New Delhi
+91 11 3066 3010
[email protected]
BACKGROUND
Demonstrating its resolve to continue India‟s „ease of doing business‟, the
Government has proposed changes in Foreign Direct Investment (“FDI”) Policy.
The overall theme of these policy and procedural reform resonates with
Government‟s mantra for ‘minimum government and maximum governance’.
The Press Release announces tangible measures to increasing FDI caps in select
sectors, placing more activities under automatic route and easing of entry
Rajeev Dimri, New Delhi
+91 124 669 5050
[email protected]
Gokul Chaudhri, New Delhi
+91 124 669 5040
[email protected]
conditionalities. The reforms are broadbased, touching upon variety of sectors,
including, Defence, Construction & Development, Retail, Broadcasting, Civil
Aviation, Banking and Manufacturing.
In subsequent paragraphs we have summarized key aspects of the reforms
announced by the Government.
Defence

The policy for FDI in „Defence‟ has always tried to balance the
sensitivity concerns inherent in the sector and the need to continuously
1
upgrade country‟s defence capabilities. In 2014 , the Government
took a major step by enhancing FDI cap from 26 percent to 49 percent,
albeit under government approval route, subject to ownership and
control being vested with Indian residents and existing conditionalities
under the FDI Policy being met. Proposals involving FDI beyond 49
percent were put up for consideration of the Cabinet Committee for
Security (“CCS”) on case to case basis, provided access to modern
and „state of art‟ technology was likely.
Amit Jain, Pune
+91 20 668 19010
[email protected]
SUMMARY OF CHANGES PROPOSED TO FDI POLICY
I.
Bobby Parikh, Mumbai
+91 22 6135 7010
[email protected]

In a bold policy leap, the Government has now proposed to place FDI
upto 49 percent in „Defence‟ sector under the automatic route. In case
FDI > 49 percent, the investors would now be required to approach the
Foreign Investment Promotion Board (“FIPB”), instead of the CCS.
The other proposals are as follows –

Investment by FPIs /FVCIs to be allowed upto 49 percent; earlier
the same was capped at 24 percent. This shall permit a number
of widely /publicly held defence enterprise to tap hitherto
unutilized foreign investment sources.

In case of change in ownership pattern on account of fresh
infusion of funds within the permitted automatic route, or transfer
of stake from existing non-FDI investor to a new FDI investor,
prior Government approval will be required.

It may emerge that proposed changes are intended to encourage
domestic companies willing to enter into the sector, or ramp up their
existing Defence manufacturing capabilities by leveraging FDI /FPI
investments upto 49 percent with minimal approval requirement
/compliance. On the flip side, the liberal entry norms should promote
technology collaboration in the form of enhanced participation by
foreign defence OEMs in joint venture/s with Indian partners.
II.
Construction development

Out of the various sectors in which changes have been proposed, the
construction development sector has received the largest attention.
Various goals outlined by the government like „housing for all by 2022‟,
the development of 100 smart cities, etc, required radical changes in
the extant FDI regime.

With the proposed changes, the decade old policy on this sector would
be given a makeover to suit present requirements. It is anticipated
that fine print of the FDI Policy shall make such changes applicable to
all existing and new projects. The proposed amendments have been
discussed below –

Minimum area and minimum capitalization conditions removed
The existing policy required development of a minimum area of
20,000 square meters and also the need to bring in USD 5 million
to be brought in within 6 months of commencement of the project.
These conditions have now been removed in entirety. These
conditions were onerous and required that foreign investment
could be made only in large projects. This change would ensure
that development of projects using foreign investment which were
restricted to metros and tier-1 cities for lack of commitment will
now find way into suburban cities, tier 2 and 3 cities where the
investment requirement is not high.

Each phase to be considered as a separate project
Given that large projects are usually completed in multiple
phases, the policy now considers each phase a project as a
separate project. This change shall facilitate the investor to exit a
portion of the investment in the project prior to the 3 year lock in
once the identified phase is developed ie in line with the proposed
relaxation in lock-in requirements discussed below.

Lock in period of 3 years with reference to each tranche of
investment; no lock-in for NR to NR transfers
The earlier policy linked the exit of the investment to development
of the loosely defined „trunk infrastructure‟ of the project. These
conditions ensured that the investor had no clarity on the ultimate
exit and the risk of development fell on the investor. In order to
strike a balance, it has now been proposed that any foreign
investment would be subject to a lock in of 3 years. However, the
investor would be permitted to exit anytime earlier in case the
project /trunk infrastructure is completed. The 3 years would be
counted with respect of each tranche of foreign investment
brought in.
As a further relaxation, since it does not involve any repatriation of
funds from India, the transfer of stake from one non-resident to
another non-resident would not be subject to any lock in or any
government approval.

„Real estate business‟ defined not to include earning of rent
/income from lease of property
The FDI Policy prohibits foreign investment in Real estate
business. The term „Real Estate business‟ was earlier defined to
mean dealing in land and immovable property with a view to
earning profit therefrom with an exclusion for construction
development projects. The scope of the exclusion is now
proposed to be expanded to cover earning of rent /income from
leasing as not amounting to transfer.
The term „transfer‟ is proposed to be defined in a manner similar
to the definition under the income-tax law for capital gains tax
purposes that inter alia includes a transaction allowing possession
as per section 53A of the Transfer of Properties Act and a
transaction for acquisition of shares that has the effect of
transferring or enabling enjoyment of an immovable property.
The above change read with the relaxation for FDI in completed
assets (discussed below), provides the much needed clarity for
FDI in completed assets and potentially opens up newer avenues
for FDI in all forms of rent yielding projects

FDI in completed assets
While the language in the press release allowing FDI in completed
projects for operation and management is the same as is it was in
the amendments made in December 2014. This read with the
proposed amendment to the definition of real estate discussed
above unambiguously clarifies the intent of the government to
allow FDI in acquisition of completed projects. The terms
„operation and management‟ that succeed „completed projects‟
are to ensure that projects being invested are economically
operational and investments not being made in non operational
projects with an intent to speculate in real estate which is
prohibited activity.
However, it would be relevant to note that it is proposed to
introduce a lock-in of 3 years in respect of investment in
completed projects. The manner in which this lock-in will be
applied if FDI obtained in the past is used for acquisition of
completed projects is a grey area and some clarity on this aspect
may be expected in the final press note.
III.
Banking – Private

With a view to provide full fungibility to foreign investment in the Indian
Private Banking sector, the Government has liberalized the foreign
portfolio investment limit (ie for FIIs /FPIs /QFIs) in the Indian Private
Banking sector from the existing sub-limit of 49 percent to the
applicable sectoral cap of 74 percent for the Indian Private Banking
sector.

Hitherto, FIIs /FPIs /QFIs were permitted to invest, in aggregate, upto
24 percent of the total paid-up capital of an Indian private sector bank.
The limit of 24 percent could be raised to 49 percent by the Indian
private sector bank by passing a board resolution followed by a special
resolution by the general body of the Indian private sector bank.
Going forward, Indian private sector banks can raise the earlier limit of
49 percent to 74 percent for investment by FIIs /FPIs /QFIs.

Most marquee Indian private sector banks had already reached the
limit of 49 percent for investment by FIIs /FPIs /QFIs. The
liberalization in the foreign portfolio investment limit in the Indian
Private Banking sector will make it easier for Indian private sector
banks to raise capital from foreign portfolio investors, providing an
impetus to the Indian Private Banking sector. Further, this should also
improve the trading of stocks on Indian bourses of blue-chip Indian
private sector banks by FIIs /FPIs /QFIs.
IV.
Manufacture

Continuing with its policy push to promote „Make in India‟ programme,
the Government has proposed that manufacturers will be permitted to
sell their products through wholesale, retail and e-commerce
platforms, without having to obtain a Government approval.

This proposal appears to be more of a clarification than policy
liberalisation, considering that the existing FDI Policy did not lay down
any explicit conditions /restrictions for manufacturing sector.

Further, a conjoint reading of this proposal along with proposals under
Single Brand Retail Trading (“SBRT”) heading may suggest that in
case of Indian manufacturer, being the owner of the Indian brand, the
permission to sell its own branded products in any manner (ie
wholesale, retail, including through e-commerce platforms) shall be
subject to the condition that the Indian manufacturer manufactures in
India at least 70 percent (in value terms) of its products in-house, and
not more than 30 percent of products is outsourced to other Indian
manufacturers.

The 70:30 conditionality emerges as a policy move to discourage
„contract manufacturing‟ often resorted to by Indian manufacturer
owning Indian brand, to get around potential characterization of their
activities as „SBRT‟. Having said, it will be important to review the fine
print to determine nuances of the above conditionality in the context of
Indian manufacturer of products under Indian brand.
V.
Trading
SBRT
FDI in SBRT has been a subject matter of prolonged policy deliberations,
and has witnessed series of progressive (incremental) reforms over past
years. Continuing with the policy to further encourage FDI in SBRT, the
Government has proposed following policy relaxations –

In case of „state-of-art‟ and „cutting-edge technology‟ segment, the
extant condition of mandatory local sourcing (of 30 percent of value of
goods purchased) can be dispensed by the Government.

To do away with ambiguity as to the manner in which compliance with
sourcing conditionality is to be reckoned, it has been clarified that
cases where sourcing requirement is applicable, the compliance with
the condition would be reckoned from date of opening of first store,
instead of receipt of FDI.

Entities permitted to undertake SBRT have now been allowed to
engage in retail trading by way of e-commerce. This proposal in
particular is likely to be well received by retailers who until now were
constrained in their reach, for having been precluded from undertaking
B2C e commerce.

In past, concerns have been raised regarding applicability of FDI
Policy for SBRT on Indian brands, largely on account of certain
prescribed conditions which are difficult to be met by Indian brands.
Addressing such concerns, the Government has proposed that SBRT
in Indian brands would be exempted from following conditions 

Products to be sold internationally under the same brand;
Foreign investment is either by the brand owner or the first-level
licensor.
Indian brands should be owned and controlled by resident Indian citizens
and /or companies (owned and controlled by resident Indian citizens).
Duty Free Shops

FDI upto 100 percent has been permitted, under automatic route, in
Duty Free Shops located and operated in the Customs bonded areas.
Wholesale Cash & Carry activities

To provide level playing field for traders by allowing them to leverage
economies of scale, it has been proposed to permit a single entity to
undertake both SBRT and wholesale cash & carry activities
simultaneously, provided conditions prescribed for the respective
activities are complied with by respective business arms.
VI.
Limited Liability Partnerships (“LLP”)

As per the existing FDI Policy, FDI upto 100 percent is permitted in
LLP under the Government approval route, provided such LLP is
operating in a sector where 100 percent FDI is allowed and there are
no FDI-linked performance conditions (hereinafter such LLP being
referred to as “eligible LLP”). Additional conditions were prescribed in
relation to LLP, including restriction on downstream investment by
eligible LLP.

The Government has now proposed that FDI in eligible LLP will be
under automatic route. Further, eligible LLP would be permitted to
make downstream investment in another company or eligible LLPs.
The term „ownership‟ and „control‟ are also proposed to be defined with
reference to LLP.

This proposal is a significant outcome emerging from latest policy
review, and shall enable enhanced flexibility for investors in deciding
form of business presence in India. Particularly in Financial Services
Industry and certain infrastructure sectors, viz power and EPC space,
where investors have long toyed with the idea of making investments
in Indian LLP, but were constrained due to requirement of onerous
entry approval.
VII. Investment by Companies /Trusts /Partnerships Owned & Controlled
by Non Resident Indians (“NRIs”)

2
Investments made by NRIs under Schedule 4 of FEMA (TISPRO )
Regulations are deemed to be at par with investments made by
residents. To bring about parity for investments made by NRIs
through overseas entities, the Government has proposed that
investments made by companies /trusts /partnership firms,
incorporated outside India and owned and controlled by NRIs will be
treated at par with investments made directly by NRIs.
VIII.
Plantation

The existing FDI Policy limits FDI in plantation activities to „Tea
plantation‟, with FDI upto 100 percent being allowed under
Government approval route.

The Government has now proposed to allow FDI upto 100 percent in
Coffee, Rubber, Cardamom, Palm oil and Olive oil plantations.
Further, the Government has proposed that FDI in plantation activities
would now be under automatic route.

From a long term perspective, such policy move is likely to yield export
linked advantages for the economy at large.
IX.
Civil Aviation Sector

In addition to „Scheduled Air Transport Service /Domestic Scheduled
Passenger Airline‟, the Government has proposed to permit FDI upto
49 percent in „Regional Air Transport Service‟ under automatic route.
This proposal is targeted to promote foreign investments in the new
sub category in scheduled air transport, in line with the Regional
Connectivity Scheme proposed to be introduced for middle-class fliers,
with effect from April 1, 2016.
X.
Establishment of Indian company /transfer of ownership or control of
Indian company

The existing FDI Policy provides for a requirement of Government
approval in case of establishment of an Indian company /transfer of
ownership or control of Indian company, if the company operates in
sectors, other than sectors in which FDI upto 100 percent is permitted
under automatic route.

The Government has now proposed to limit this requirement to only
sectors falling under the Government approval route (such as
Defence, Insurance).
XI.
Increase in sectoral caps

The Government has proposed to ease out the FDI caps in following
sectors –
Sector
FDI cap
Existing
Proposed
(i)
Broadcasting
Upto 49 percent:
Upto 49 percent:
Carriage Services
automatic route
automatic route
To-Home, Cable
Beyond 49
Upto 100 percent:
Networks (MSO
percent upto 74
Government approval
undertaking
percent:
route
upgradation of
Government
networks towards
approval route
[Teleports, Direct-
digitization and
addressability),
Mobile TV and
Headend-In-TheSky]
(ii) Broadcasting
Carriage Services
Upto 49 percent:
automatic route
[Cable Networks
(MSOs not
undertaking
upgradation of
networks towards
digitization and
addressability and
LCOs)]
(iii) Broadcasting
Upto 26 percent:
Upto 49 percent:
Content Services
Government
Government approval
[Terrestrial
approval route
route
Upto 100
Upto 100 percent:
Content Services
percent:
Automatic route
[Up-linking of
Government
Non-„News &
approval route
Broadcasting FM
(FM Radio), Uplinking of „News &
Current Affairs‟
TV Channels]
(iv) Broadcasting
Current Affairs‟
TV Channels,
Down-linking of
TV Channels]
(v) Air Transport
Upto 49 percent:
Upto 100 percent:
services
automatic route
automatic route
[Non-Scheduled
Air Transport,
Beyond 49
Ground Handling
percent upto 74
Services]
percent:
Government
approval route
(vi) Credit Information
Upto 74 percent:
Upto 100 percent:
automatic route
automatic route
Upto 74 percent:
Upto 100 percent:
establishment and
Government
Government approval
operation
approval route
route
Companies
(vii) Satellites -
XII.
Other proposals

Automatic approval route is permitted for foreign investment
(regardless of amount /extent of foreign investment) into a defunct
company (ie an Indian company which has no operations nor
downstream investments) for undertaking activities which are under
automatic route and without FDI-linked performance conditions.

The term „internal accruals‟ is proposed to be defined. Depending on
how the definition is worded, there could be an impact on „sources of
fund‟ available for downstream investments.

Investment by way of swap of shares in sectors receiving FDI under
automatic route, would not require Government approval.

Simplification of conditionalities re FDI Policy on Agriculture and
Animal Husbandry, and Mining and mineral separation of titanium
bearing minerals and ores.

Enhancing of FIPB‟s empowerment by increasing the monetary limit
(from INR 3,000 crores to INR 5,000 crores of total foreign equity
inflow) of proposals eligible for FIPB‟s consideration. Proposals
involving total foreign equity inflow > INR 5,000 crores would be
considered by Cabinet Committee on Economic Affairs.
BMR Comments:
Going by qualitative statistics released by World Bank, World Economic
3
Forum and UNCTAD , the investment policy reforms, witnessed over past
18 months have been recognized as having incremental effect.
The latest policy review marks another key step forward in India‟s FDI
regime as it opens many sectors, which hitherto failed to reap benefits of
FDI liberalisation owing to investors‟ cautious approach. In emerging FDI
landscape, the erstwhile 26 percent equity threshold nearly loses its
relevance, as „49 percent‟ equity participation will emerge as acceptable FDI
threshold in almost all sectors, except print news media, and public sector
banking. Also, the onerous approval requirements have been largely done
away with for majority of sectors, restricting such requirement to only a few
closely guarded sectors (ie multi-brand retail trading; Insurance and
Broadcasting).
Relaxation of minimum capitalization norms in case of construction
development sectors shall have positive ramifications for the sector, and
shall trigger rush of investments in tier 2 affordable housing segment.
Proposal to allow SBRT entities to undertake e-commerce is likely to receive
cheer from investors and high value fashion brands, which awaited this
policy fillip to trigger level playing field in Indian markets vis-à-vis certain
marketplace players. Similarly, permission to receive FDI under automatic
route in Defence sector (even upto 49 percent) shall contribute positively
towards targeted indigenization of defence manufacturing.
Whilst these proposals bode well when viewed holistically, it will be definitely
interesting to watch out for detailed Press Notes, likely to follow and which
has the effect of putting in place the policy framework for investors to refer
to. Thus, it is only fair to say that the true impact of these policy can be
assessed once the updated FDI Policy is released by the DIPP.
Clearly the current reforms are not to be seen as end of road for the
Government insofar as FDI Policy is concerned as there are areas of FDI
Policy which can drive the next round of reforms. For example, foreign
investment in brownfield pharma could have been placed back under
automatic route, minimum capitalization norms for non-banking finance
companies could have been eased, etc. Hopefully, these incremental
reforms shall follow in due course as India embarks upon the journey to
becoming truly an „open economy‟.
1
Press Note 7 (2014 series) issued by the Department of Industrial Policy & Promotion (“DIPP”)
2
Transfer or Issue of Security by Persons Resident Outside India
3
ie, World Bank‟s Ease of doing business index; World Economic Forum‟s Global competitive index;
UNCTAD‟s World Investment Report 2015
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