updates on fdi policy

Updates On FDI Policy

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India (GOI) had released the consolidated foreign direct investment (FDI) policy circular of 2017 (New FDI Policy). The New FDI Policy is effective immediately from the date of its publication, i.e., 28 August 2017. The New FDI Policy supersedes the consolidated FDI policy of 2016 issued by the DIPP on 7 June 2016 (Erstwhile FDI Policy) and consolidates all the press notes issued by the DIPP post 7 June 2016 until 27 August 2017.

The Key changes brought about in the FDI regime through the New FDI Policy have been set out in below:

  • Under the former FDI Policy, an entity was required to notify the Secretariat of Industrial Assistance (SIA), DIPP and Foreign Investment Policy Board (FIPB) of its downstream investment. The New FDI Policy requires such intimation to be made to the Reserve Bank of India (RBI) and the Foreign Investment Facilitation Portal.
  • The New FDI Policy, by doing away with the reference of ‘single brand’, allows wholesale/cash & carry traders to undertake retail trading by way of both single brand retail trading as well as multi brand retail trading, through the same entity, subject to some conditions.
  • The former FDI Policy prohibited an e-commerce entity from permitting more than 25% of the sales effected through its market place from one vendor or its group companies. The New FDI Policy clarifies that the 25% of sales value must be computed per financial year.
  • Under the former FDI Policy, additional FDI into the same entity within the approved foreign equity percentage/or into a wholly owned subsidiary did not require fresh approval. The New FDI Policy has capped the additional FDI to a cumulative amount of INR 5,000 crore, beyond which, fresh approval will be required to be sought.
  • Presently, FDI is permitted in Limited Liability Partnerships operating in sectors/activities where: (i) 100% FDI is allowed through the automatic route; and (ii) there are no FDI linked performance conditions. While the former FDI Policy was silent on what constituted FDI linked performance conditions, the New FDI Policy has defined FDI linked performance conditions as sector specific conditions for companies receiving foreign investment.
  • The Erstwhile FDI Policy was silent with respect to conversion of an FDI funded Limited Liability Partnership (LLP) into a company and vice versa. The New FDI Policy allows conversion of an FDI funded LLP operating in sectors/activities where (i) 100% FDI is allowed through the automatic route; and (ii) there are no FDI linked performance conditions, into a company, under the automatic route. Similarly, conversion of an FDI funded company operating in sectors/activities where (i) 100% FDI is allowed through the automatic route; and (ii) there are no FDI linked performance conditions, into an LLP, is permitted under the automatic route.
  • RBI has amended Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FEMA 20) vide FEMA 20 (Fifteenth Amendment) Regulations, 2016 dated 10 January 2017, to allow startups to issue convertible notes to foreign investors. Earlier, FDI in startups could only be made by foreign venture capital investors by subscribing to equity or equity linked instruments or debt instruments.

Also Read: FDI In Limited Liability Partnership

The New FDI Policy has introduced certain key changes as highlighted above, with an intent to provide an investor-friendly climate to foreign players. However, certain ambiguities which existed under the earlier FDI Policy continue to remain under the New FDI Policy. For instance, owing to the broad definition of real estate business i.e., dealing in land and immovable property with a view to earning profit, there is no clarity on whether consultancy or brokerage will be covered under the ‘real estate business. Further, while the policy defines the term ‘manufacturing’, it is silent on the definition of ‘manufacturer’. Therefore, it is unclear whether an entity will be deemed to be a manufacturer even if it outsources a part of its manufacturing activities to third parties or relies on contract or toll manufacturing in India.

We expect a series of reforms and clarifications through press notes in the days to come in line with the government’s initiatives such as ‘Make in India’ and improving the ease of doing business in India.

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