The Department of Industrial Policy and Promotion (“DIPP”) through its press notes being press note 4 dated 22 August 2013 (“Press Note 4”), press note 5 dated 22 August 2013 (“Press Note 5”) press note 6 dated 22 August 2013 (“Press Note 6”) has reviewed the policy on Foreign Direct Investment (“FDI”).
Press Note 4
Press Note 4 revises the definition of the term “control” under the Consolidated Foreign Direct Investment Policy 2013 (“FDI Policy”). The change is to paragraph 2.1.7 of the FDI Policy. The definition of control under paragraph 2.1.7 of the FDI Policy mandated that a company would be considered to be controlled by resident Indian citizens if the resident Indian citizens or Indian companies that are controlled by resident Indian citizens, have the power to appoint the majority of the directors in such company.
The revised position gives an inclusive definition to the term “control”; it includes the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholder agreements or voting agreements.
Note – If reserved items or veto rights or any other similar private arrangement in a shareholders agreement give effective control of management to resident Indian shareholders (that is resident Indian citizens holding shares of that company or member companies which are controlled by resident Indian citizens), despite such arrangement not meeting any other criteria, the company would be considered to be controlled by resident Indian citizens.
Press Note 5
Press Note 5 revises paragraphs 18.104.22.168 (iii), 22.214.171.124 (iv), and 126.96.36.199 (vi) of the FDI Policy which deal with multi brand retail trading. The original position under paragraph 188.8.131.52 (iii) required, 50% of the total FDI was to be invested in backend infrastructure within three years of the first tranche of FDI. The revised position is that 50% of the FDI brought in through the first tranche of USD 100 million to be invested in backend infrastructure within three years of the first tranche. Also in the revised position, it is clarified that after the first tranche of USD 100 million, the multi brand retailer shall have the discretion to determine how much should be invested in back end infrastructure.
The original position under paragraph 184.108.40.206 (iv) required 30% of procurement of manufactured or processed products from Indian small industries, with small industries being entities with a total investment in plant and machinery not exceeding USD 1 million. The revised position revises the definition of an Indian small industry by increasing the maximum investment in plant and machinery to USD 2 million. The revised position requires the entity from which procurement has to be made, to be an Indian small industry, at the time of first engagement with the multiband retailer.
Note- Previously the text of the FDI policy seemed to suggest that at any time the 30% procurement will have to be done from entities which at the time of procurement will qualify as a small scale industry. The problem with such an interpretation was that it was against the economic logic that upon any entity becoming a source of procurement from the massive multi brand retailer; it will quickly grow to a scale above the 2 million dollar equipment mark. If the retailer has to then procure from a new small industry, such regulation will neither develop value for the domestic industry nor will it allow such multi brand retailers to standardise their procurement in India. With the changed position, an entity to be small scale industry for the purposes of the procurement requirement under the FDI Policy, it will need to qualify as small scale only at the time of first engagement with the multi brand retailer, and its subsequent growth will not disqualify it from being considered for the purpose of that multi brand retailer, to be of small scale in nature. Therefore, if an Indian entity at the time of first engagement with a multi brand retailer has equipment worth less than USD 2 million, it will continue to be considered a small scale industry for the purposes of its engagement with that particular multi brand retailer, even if such Indian entity outgrows the USD 2million equipment cost (not including depreciation) during the course of its engagement with that particular multi brand retailer.
The original position under paragraph 220.127.116.11 (vi) permitted the establishment of retail sales outlets only in cities with a population in excess of 10 lakhs as per the 2011 census, in case of states and union territories not having such a city the concerned state government could permit the establishment such retail sales outlets. The revised position allows for the establishment of retail sales outlets in cities with a population in excess of 10 lakhs as per the 2011 census and also other cities where the concerned state government permits it. The revised position does not require such other cities to be situated in states or union territories with no cities having a population over 10 lakhs as per the 2011 census.
Note: In light of the federalism issue which has dogged this liberalisation exercise from its inception, this change at least ensures greater market penetration for the multi brand retailers in the states that may allow for such operations.
Press Note 6
Press Note 6 reviews the FDI caps and routes in various sectors dealt with by the FDI Policy. Press Note 6, also makes substantial changes the conditions for the FDI in certain sectors. The sectors for which such revisions are introduced are as follows:
- Tea Sector Including Tea Plantations
- Petroleum and Natural Gas Sector
- Defence Sector
- Courier Services
- Telecom Services
- Test Marketing
- Single Brand Product Retail Trading
- Asset Reconstruction Companies
- Commodity Exchanges
- Credit Information Companies
- Infrastructure Companies In The Securities Markets
- Power Exchanges
Tea Sector Including Tea Plantations
Paragraph 1.1 of Press Note 6 revises the FDI Policy in case of the Tea sector including tea plantations under paragraph 6.2.2 of the FDI Policy the condition requiring compulsory divestment to a resident Indian entity or Indian public within a period of five years under paragraph 18.104.22.168 (i) stands deleted.
Petroleum and Natural Gas Sector
Paragraph 1.2 of Press Note 6 revises paragraph 22.214.171.124 of the FDI Policy, which deals with petroleum and natural gas sector. The revision introduced is to the route of the investment, which stands changed from government route to automatic route while the FDI cap of 49% continues to stay unchanged.
Paragraph 1.3 of Press Note 6 revises the FDI Policy in case of the defence sector under paragraph 126.96.36.199 Press Note 6 has revised the position from 26% FDI cap with entry through the Government route, to a FDI cap of 26%, with the entry route up to 26% being Government, and in excess of 26% being through the Cabinet Committee on Security (“CCS”), on a case to case basis, to ensure access to modern and state of the art technology. The Press Note 6 also makes additions to conditions under 188.8.131.52 of the FDI policy. The Additions made are as follows:
- Investments by Foreign Institutional Investors through portfolio investments are not permitted.
- All applications for permission of the government for FDI in defence must be made to the Secretariat of the Foreign Investment Promotion Board.
- Applications for FDI not exceeding 26% will follow existing procedure. In case of the inflow being for a sum exceeding Rs. 1200 Crores must be approved by the Cabinet Committee for Economic Affairs (“CCEA”)
- Applications for FDI exceeding 26% will be examined by the Department of Defence Production (“DoDP”) to examine access to state of the art technology. On the basis of the recommendations of the DoDP and the FIPB, the DoDP will seek approval of the CCS.
- Proposals for FDIs in excess of Rs.1200 when the FDI exceeds 26%, where the approval of CCS is necessary, the approval of CCEA is not necessary.
Paragraph 1.4 of Press Note 6 revises paragraph 6.2.10 of the FDI Policy, which deals with Courier Services. The revision introduced is as to the route of the investment, which stands changed from government route to automatic route.
Paragraph 1.5 of Press Note 6 substantially revises paragraph 6.2.15 of the FDI Policy, which deals with the telecom services. The FDI caps, which differed on the basis of specified services, are now merged. The FDI cap for which is at 100% with the entry route being automatic up to 49% and government in excess of 49%. The entry in excess of the 49% will require the approval of the FIPB subject to observance of licensing and security conditions by licensees and investors as notified from time to time by the Department of Telecommunications, Government of India.
Paragraph 1.6 of Press Note 6 deletes paragraph 184.108.40.206 of the FDI Policy, which dealt with test marketing.
Single Brand Product Retail Trading
Paragraph 1.7 of Press Note 6 revises paragraph 220.127.116.11 of the FDI Policy, which deals with single brand product retail trading. The revision introduced is as to the route of the investment, with the entry route being automatic up to 49% and government in excess of 49%. Paragraph 1.7 also revises paragraphs 18.104.22.168 (2) (d) and 22.214.171.124 (3) of the FDI Policy. On revision Paragraph 126.96.36.199 (2) (d) permits multiple non-resident entities to undertake single brand retail trading for the same brand. Paragraph 188.8.131.52 (3) on revision only requires approval for FDI in single brand retail trader in excess of 49% from the Secretariat for Industrial Assistance, DIPP.
Asset Reconstruction Companies (ARC)
Paragraph 1.8 of Press Note 6 revises paragraph 184.108.40.206 of the FDI Policy, which deals with asset reconstruction companies. The FDI cap for which has been revised to 100% from74% of the paid up capital of the ARC with the entry route being automatic for FDI up to 49% and government route in case of FDI being in excess of 49%.
Paragraph 1.9 of Press Note 6 revises paragraph 220.127.116.11.2 of the FDI Policy, which deals with Commodity Exchanges. The revision introduced is as to the route of the investment, which stands changed from government route to automatic route. Paragraph 1.9 of the Press Note 6 also makes an addition to paragraph 18.104.22.168.3 wherein in states that foreign investment in commodity exchanges will be subject to the guidelines of the Department of Consumer Affairs and the Forward Markets Commission.
Credit Information Companies
Paragraph 1.10 of Press Note 6 revises paragraph 22.214.171.124.1 of the FDI Policy, which deals with credit information companies. The FDI cap for which has been revised to 74% with the entry route being revised to automatic.
Further the FII investment limit of 24% for Credit Information Companies listed at stock exchanges will now be calculated as 24% within the overall limit of 74% foreign investment.
Infrastructure Companies in the Securities Markets
Paragraph 1.11 of Press Note 6 revises paragraph 126.96.36.199.1 of the FDI Policy, which deals with infrastructure companies in the securities markets. The revision introduced is to the route of the investment, which stands changed from government route to automatic route with the respective FDI and FII caps remaining the same.
Paragraph 1.12 of Press Note 6 revises paragraph 188.8.131.52 of the FDI Policy, which deals with power exchanges. The revision introduced is to the route of the investment, which stands changed from government route to automatic route. Paragraph 1.12 also deletes subparagraph (ii) to paragraph 184.108.40.206 of the FDI Policy wherein it used to state that FII would be permitted through the automatic route and FDI would be permitted through the government route.