The Indian Cabinet Committee on Economic Affairs (CCEA) has permitted widespread changes to the foreign direct investment (FDI) regime. Many expect this to be a shot in the arm to the faltering Indian economy and comprehensively address issues of policy paralysis and economic stagnation.
Having once suspended its decision to permit FDI in multi-brand retail, the CCEA has now removed the suspension . The CCEA notes that following the previous decision of 24.11.2011 there were challenges in implementation and the policy was suspended. The policy was widely discussed with the State Governments, some of whom had supported and some opposed the decision.However, since the overall support was for implementation of FDI in multi-brand retail, it was decided tho remove the suspension over the original decision of 24.11.2011.
In addition to the conditions specified in the original decision of 24.11.2011 (investment to be with the prior approval of the foreign investment promotion board (FIPB), minimum investment amount per project in multi-brand retail of USD 100 million; 30% of the inputs are required to be sourced from medium and small enterprises), FDI will be subject to the following additional conditions:
(i) Retail sales outlets may be set up in those States which have agreed or agree in future to allow FDI in Multi-brand retail .
(ii) The establishment of the retail sales outlets will be in compliance of applicable State laws/ regulations, such as the Shops and Establishments Act etc.
(iii) Retail sales outlets may be set up only in cities with a population of more than 1 million and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking;
(iv) In States/ Union Territories not having cities with population of more than 1 million as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities.
The locations of such outlets will be restricted to conforming areas, as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.
(v) At least 50 per cent of total FDI brought in shall be invested in ‘backend infrastructure’ within three years of the induction of FDI, where ‘back-end infrastructure’ will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure.
Therefore, implementation of the policy is not a mandatory requirement for all States and enterprises can be set up only in States which agree to implementation of this policy.
An additional inclusion is the specification of the 3 year time-frame for for setting up the back-end infrastructure. It is expected that this will lead to increased and more effective investment in back-end infrastructure.
Press Note 1(2012 Series) dated 10.1. 2012, permitted FDI up to 100%, in single brand retail, subject to specified conditions, including conditions that:
(i) The foreign investor should be the owner of the brand.
(ii) In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen. “SMEs” were defined as industries with capital investment less than US $ 1.00 million at the time of installation of plant and machinery.
The CCEA approved the following modifications to the above conditions:
(i) A non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country, for the specific brand, if it has an agreement with the brand owner for undertaking single brand product retail trading in respect of the specific brand. Evidence of this agreement has to be provided at the time of making the application for approval.
(ii) In respect of proposals involving FDI beyond 51%, sourcing of 30%, of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where it is feasible.
The CCEA considered an amendment to the condition related to brand ownership necessary in view of business models adopted by retail brands worldwide and often create a distinction between the investing arm and the brand owning arm. To avoid problems faced by investors to use brand owning vehicles as investment vehicles, these amendments were carried out.
The important change is with respect to the 30% sourcing requirement from SMEs, which has become preferable instead of mandatory. This will certainly allow investment from a wider range of product companies (e.g., specialized, high-technology products), who would have found it impossible to comply with the sourcing requirement. This means that for general products, purchases can be made from SMEs, wheras for specialized products, production capacities will have to built in India, which will lead to greater investment in India.
The CCEA has permitted FDI upto 49% in scheduled and non-scheduled air transport services. Till date, foreign airlines were allowed to participate in the equity of companies operating cargo airlines, helicopter and seaplane services, but not in undertakings operating air-transport services. FDI is permitted with the approval of the FIPB.
The investment shall also be subject to the following conditions:
(i) A Scheduled Operator’s Permit can be granted only to a company:
a. That is registered and has its principal place of business within India,
b. The Chairman and at least two-thirds of the Directors of which are citizens of India, and
c. The substantial ownership and effective control of which is vested in Indian nationals.
(ii) All foreign nationals likely to be associated with Indian Scheduled and Non-Scheduled air transport services, as a result of such investment, shall be cleared from security view point before deployment, and
(iii) All technical equipment that might be imported into India, as a result of such investment, shall require clearance from the relevant authority in the Ministry of Civil Aviation.
Enhanced FDI has been permitted for broadcasting services, bringing it in par with the telecom sector. The revised FDI limits are as follows:
(i) Teleports (setting up up-linking HUBs/Teleports): Direct to Home (DTH); Cable Networks (Multi-System-Operators operating at National or State or District level and undertaking upgradation of networks towards digitalization and addressability):
Increase of FDI from 49% to 74%. Upto 49% under the automatic route and thereafter with FIPB approval.
(ii) Mobile TV:
FDI upto 74% , with 49% under the automatic route and thereafter with FIPB approval.
(iii) Headend-in-the Sky Broadcasting Service:
FDI upto 74% , with 49% under the automatic route and thereafter with FIPB approval.
The existing limit of 74 percent foreign investment – automatic route up to 49 percent and Government route beyond 49 percent and up to 74 percent – would continue, except,
(a) In respect of Cable Networks (Other Multi-System-Operators not undertaking up-gradation of networks towards digitalization and addressability and Local Cable Operators), the existing limit of 49% FDI under the automatic route, would continue.
(b) Similarly, for up-linking of ‘News & Current Affairs’ TV channels / FM Radio, the existing limit of 26 percent foreign investment, with FIPB approval, would continue and for up-linking of Non-‘News & Current Affairs’ TV Channels / Down-linking of TV Channels, the existing policy of 100 % FDI with FIPB approval would continue.
FDI upto 49% (which comprise of 26% direct FDI and 23% Foreign Institutional Investor (FII) investment) has been permitted in Power Trading Exchanges. FII investment has been permitted under the automatic route where FDI investment is subject to FIPB approval.
At present India has two functioning power exchanges, the Indian Electricity Exchange (IEX) and the Power Exchange of India (PXAI). It is understood that MCX has also obtained a power trading license.
PXV Law Partners