India - Changes To The FDI Policy: Exploring The Potential Impacts.

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Asia Pacific Legal Updates

 

17 September, 2019

 

India - Changes To The FDI Policy: Exploring The Potential Impacts.

 

INTRODUCTION

 

On August 28, 2019 the Union Cabinet approved the proposal for amending certain provisions of the extant foreign direct investment policy of India (the “FDI Policy”), suggesting relaxation of the foreign direct investment (the “FDI”) norms for various sectors (the “Amendment”) 1. The changes have been brought in to make India a more attractive destination for FDI.

 

The changes proposed to be brought in for various sectors by the Amendment are discussed below.

 

SINGLE BRAND RETAIL TRADING (“SBRT”)

 

Local Sourcing Requirement and Sourcing for Global Operations

 

Under the extant guidelines, if an entity engaged in SBRT has more than 51% FDI, then such entity is required to procure at least 30% of the value of the goods purchased, locally, from India (the “Local Sourcing Requirement”). Such entity is permitted to meet the Local Sourcing Requirement during the first 5 financial years as an average and by also taking into account its global operations. Thereafter, such requirement is to be met annually and towards its operations in India only. The FDI Policy also provides that in case souring for global operations is also to be accounted for meeting the Local Sourcing Requirements, such sourcing should happen through the entity receiving FDI in India or its group companies.

 

The Amendment provides that an entity engaged in SBRT shall now be permitted to count the procurements made from India for its global operations even beyond the initial 5 years, for meeting the Local Sourcing Requirement.

 

Further, the government feels that the current FDI Policy does not take into account the prevalent business models, where sourcing from India for global operations is not only done through the entity or its group companies, but also through unrelated third Parties. With the Amendment, the 'sourcing of goods from India for global operations' to meet the Local Sourcing Requirements, can be undertaken either through group companies, or through a third party under a legally valid contract.

 

The Amendment seeks to provide greater flexibility, ease of operations and incentivize exports or global operations for the entities engaged in SBRT. 

 

Incremental Sourcing Requirement

 

The FDI Policy provides that for the first 5 years, the Local Sourcing Requirement is to be met as an average. During such initial 5 year period, an entity undertaking SBRT can only set off the incremental value of the goods sourced from India for its global operations in a subsequent financial year against the value of goods sourced from India in the previous financial year. This position discriminates against entities that have higher exports in a base financial year as against a subsequent financial year.

 

The Amendment seeks to address this issue by creating a level playing field for all entities. It is now proposed that the entire value of the goods procured from India (as against only the incremental value of goods) can be considered towards Local Sourcing Requirement, taking into account global operations of the entity engaged in SBRT.

 

Hence, during the first 5 years, the entities undertaking SBRT will now be able set off a higher value of the goods procured from India in a base year against the value of goods procured from India in a subsequent year as well.

 

Brick and Mortar Stores – A Pre-Requisite

 

Under the current framework, operation through brick and mortar stores is a pre-requisite for starting single brand retail trading through e-commerce. With the Amendment, single brand retail trading through e-commerce will be allowed prior to opening of any brick and mortar stores. This relaxation is subject to such entity opening brick and mortar stores within 2 years from date of starting such e-commerce business.

 

COAL MINING

 

The existing FDI Policy allows 100% FDI under the automatic route for (a) coal & lignite mining, only for consumption by such entity itself (captive consumption) by power projects, iron & steel and cement units and other eligible activities permitted under and subject to Coal Mines (Nationalization) Act, 1973; and (b) for undertaking activities relating to coal processing such as setting up washeries, provided that such an entity shall not sell the washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to the coal processing plants for washing or sizing.

 

The Amendment seeks to allow 100% FDI under the automatic route for any sale of coal (not just sale of coal post processing of such coal), for coal mining (not just for captive consumption) and other associated coal mining activities including activities such as coal washery, crushing, coal handling, and separation (magnetic and non-magnetic) (also called associated processing infrastructure), subject to such activities being carried out in accordance with the provisions of Coal Mines (Special provisions) Act, 2015, the Mines and Minerals (Development and Regulation) Act, 1957, as amended from time to time, and other applicable laws in force.

 

The Amendment seeks to attract FDI in this sector by allowing global mining companies to carry out mining, processing and sale of coal. 

 

CONTRACT MANUFACTURING

 

Presently 100% FDI under the automatic route is allowed in the manufacturing sector. There have been several instances, where entities which undertake manufacturing through contract manufacturing (instead of job works) have been questioned on their status of being a manufacturer under the FDI Policy. The extant FDI Policy does not explicitly permit a manufacturer undertaking his manufacturing activities through contract manufacturing to qualify as a manufacturer for the purposes of receiving FDI.

 

With an aim to take into account the prevalent business models where the manufacturers resort to contract manufacturing and to remove the ambiguity around contract manufacturing, the Amendment provides that 100% FDI under automatic route will be allowed in case of contract manufacturing. However, the Amendment does not currently provide insight into the meaning of the term ‘contract manufacturing’ or the tests that will need to be met to qualify an activity within the ambit of contract manufacturing.

 

DIGITAL MEDIA

 

Currently, 49% FDI under the approval route is allowed for up-linking of 'news and current affairs' through television channels, while entities engaged in publishing newspapers and periodicals dealing with news and current affairs cannot receive more than 26% FDI, where such 26% FDI is also permitted only with a government approval.

 

Through the Amendment, 26% FDI will be permitted for ‘uploading or streaming of news and current affairs through digital media’ under the government route, akin to the permission available for FDI in entities engaged in print media, publishing newspapers and periodicals dealing with news and current affairs.

 

The Amendment does not define the term ’digital media’. Given that the final wording of the policy is still awaited, it may be premature to comment on what would get covered as ‘digital media’. There is much speculation around whether ‘digital media’ will also cover video content aggregators and information technology intermediaries, who along with non-news media, also aggregate and stream some news and topical videos. It is unclear if the intent is to regulate the over-the-top platforms or pure aggregators, which do not have any influence or control over the content that is aggregated on and streamed through such platforms. Depending on the final wording in the policy on this matter, current players in the market offering such services, might have to segregate their business and structure it in a way that is compliant with the new guidelines laid down pursuant to the Amendment. Further, it also hinders structures where the television channels (which are permitted to receive up to 49% FDI with government approval) also stream news or current affairs online. 

 

With decline in the global FDI, as reported by the United Nations Conference on Trade and Development 2, the Amendment seeks to attract and boost FDI in India by easing norms, making policy changes in sync with the best practices and trying to level the playing field.

 

That said, we wait to see the final wording in the revised FDI Policy to get further clarity on some of the aspects proposed through the Amendment such as the categories of digital media players intended to be regulated as well as the test for or the constituent elements of contract manufacturing.

 

Even with the ambiguities and questions that the Amendment does pose at the moment, it looks like, at the heart of such Amendment is the intent of greater liberalization of the economy and improving the conditions for ease of doing business in India. 

herbert smith Freehills

 

For further information, please contact:

 

Winnie Shekhar , Partner, Induslaw 

winnie.shekhar@induslaw.com