The Union government on Wednesday liberalised and simplified the Foreign Direct Investment (FDI) regime in a host of sectors, including Single Brand Retail Trading (SBRT), civil aviation (aimed at facilitating Air India’s divestment), construction development, power exchanges, pharmaceuticals and audit firms.
The government said the goal was to help the country attract larger FDI inflows that is expected to contribute to growth of investment, income and employment in the country.
The Union Cabinet, chaired by Prime Minister Narendra Modi, gave its approval to permit 100 per cent FDI under the automatic route for SBRT. The extant policy on SBRT allows 49 per cent FDI under the automatic route, and FDI beyond 49 per cent and up to 100 per cent through the government approval route.
Rabindra Jhunjhunwala, partner, Khaitan and Co, said in a statement, “This… will quicken the FDI clearance process as no prior government approval would be required. We expect that FDI in SBRT will now gain further momentum due to the process not being subject to regulatory scrutiny and approval process.”
The government also decided to permit SBRT entities to set off their incremental sourcing of goods from India for global operations in the initial five years, beginning April 1 of the year of the opening of first store against the mandatory sourcing requirement of 30 per cent of purchases from India. After the completion of this five-year period, such SBRT entities shall be required to meet the 30 per cent sourcing norms directly towards its India’s operation, on an annual basis, an official statement said.
‘Will violate poll promise of BJP’
Meanwhile, the Confederation of All India Traders (CAIT) said in a statement that it strongly opposed the move to allow 100 per cent FDI in SBRT through the automatic route as it would facilitate the easy entry of MNCs (multinational corporations or companies) in retail trade of India and would also violate the poll promise of the BJP.
“It’s a serious matter for small businesses. It is a pity that instead of formulating policies for the welfare, upgradation and modernisation of the existing retail trade, the government is more interested in paving the way for the MNCs to control and dominate the retail trade of India,” the CAIT said.
“This love towards MNCs is highly condemned in strong words. Such a step will also result into making large number of people jobless. CAIT will soon declare its nationwide strategy to oppose this brutal move of the government,” it said.
Record FDI inflows
The country received a record total FDI of $60.08 billion in 2016-17. However, the government said, “It has been felt that the country has the potential to attract far more foreign investment, which can be achieved by further liberalizing and simplifying the FDI regime.” It added that FDI is a major driver of economic growth and a source of non-debt finance for the economic development of the country.
Commerce and Industry Minister Suresh Prabhu tweeted, “Major FDI policy reforms approved by Union Cabinet… This will liberalise and simplify the FDI policy and provide ease of doing business in the country.”
Incidentally, the Congress party had questioned the government’s claim on the ‘record’ FDI inflows last year. Referring to Mr. Modi’s speech at the first Persons of Indian Origin (PIO) Parliamentarians Conference on Tuesday, where he said “a record $60 billion FDI came into the country last year,” party leader Raj Babbar said, “the Prime Minister should have told … that fresh investment in 2014, during the UPA government of Manmohan Singh, was ₹16.2 lakh crore and it came down to ₹ 7.9 lakh crore in 2017.”
Civil aviation
In FDI policy changes in other sectors, the government allowed foreign airlines to invest up to 49% under the approval route in Air India, subject to the conditions that: (i) Foreign investment(s) in Air India, including that of foreign Airline(s), shall not exceed 49 per cent either directly or indirectly and (ii) substantial ownership and effective control of Air India shall continue to be vested in Indian National.
As per the extant policy, foreign airlines are allowed to invest under the government approval route in the capital of Indian companies operating scheduled and non-scheduled air transport services, up to the limit of 49% of their paid-up capital. However, this provision was presently not applicable to Air India, thereby implying that foreign airlines could not invest in Air India. The government, therefore, decided to do away with this restriction.
Other sectors
In construction development, the government clarified that the real estate broking service does not amount to real estate business and is, therefore, eligible for 100 per cent FDI under the automatic route.
In power exchanges, the government allowed FIIs/FPIs to invest in power exchanges through the primary market. The government said the extant policy provided for 49 per cent FDI under the automatic route in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010. However, it added that the policy had so far restricted FII/FPI purchases restricted to the secondary market only.
Regarding audit firms, since the extant FDI policy does not have any provisions in respect of specification of auditors that can be appointed by the Indian investee companies receiving foreign investments, the government said it decided to provide in the FDI policy that wherever the foreign investor wished to specify a particular auditor/audit firm having international network for the Indian investee company, then audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network.
On pharmaceuticals, the government said the FDI policy had stated that definition of medical device as contained in the FDI Policy would be subject to an amendment to the Drugs and Cosmetics Act. “As the definition as contained in the policy is complete in itself, it has been decided to drop the reference to Drugs and Cosmetics Act from FDI policy. Further, it has also been decided to amend the definition of ‘medical devices’ as contained in the FDI Policy,” the government said.
Shares surge
Meanwhile, stock of several retail companies and airlines such as SpiceJet and Jet Airways went up after the Cabinet announcement.
On the aspect of ‘Competent Authority’ for examining FDI proposals from countries of concern, the government said “for investments in the automatic route sectors, requiring approval only on the matter of investment being from country of concern, FDI applications would be processed by the Department of Industrial Policy and Promotion (DIPP) for approval.” It added that cases under the government approval route, also requiring security clearance with respect to countries of concern, would continue to be processed by the Administrative Department/Ministry concerned.
On decisions regarding other approval requirements under the FDI policy, the government said, the issue of shares against non-cash considerations such as pre-incorporation expenses and import of machinery shall be permitted under the automatic route in case of sectors under the automatic route.
'Long overdue'
Abhishek Goenka, Leader, Direct Tax, PwC India, said in a statement, “The clarification that brokerage services are not real estate business, and hence, eligible for 100 per cent FDI under the automatic route was long overdue. The industry was saddled with differing views and interpretations on this count, and this should now ease the pain for the existing international players, as well as provide clarity for future JVs and wholly owned presence in India.”
Bhairav Dalal, partner, Real Estate Tax, PwC India, added that the clarification on real estate broking services is a welcome move "given the number of start-ups in this space offering innovative broking products.”
