The Union Cabinet approved liberalisation of FDI norms in a dozen sectors including PSU oil refineries, commodity bourses, power exchanges, stock exchanges, clearing corporations, asset reconstruction companies, tea plantations and courier services . The following amendments have been made to the Consolidated Foreign Direct Investment Policy (Circular 1 of 2013) (the “FDI Policy”) which have been communicated by issuing Press Notes 4, 5 and 6 (2013 Series). The Governments decisions on easing norms will take effect from 22nd August, 2013.
These major policy decisions are aimed at boosting the flow of foreign funds in the light of a depreciating rupee against the dollar and a bid to turn around declining investor sentiment.
Press Note 4 (2013 Series)
Press Note 4 (2013 Series) has widened the definition of ‘control’ to include not only the right to appoint a majority of the directors but also the power to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.
Press Notes 5 (2013 Series)
The FDI Policy in relation to multi-brand retail trading has been amended through Press Note 5 (2013 Series) in the following manner:
-
Even though the minimum amount of foreign direct investment in multi-brand retail trading remains unchanged (USD 100 million), the provisions have been relaxed to the extent that a retailer is now required to invest at least 50% of the total foreign direct investment brought in the first tranche of USD 100 million in backend infrastructure as opposed to the earlier position, under which the retailer was required to invest 50% of the total foreign direct investment in backend infrastructure. Additionally, the retailer is free to determine any further investment in backend infrastructure depending upon its business requirements.
-
The domestic sourcing requirements for multi-brand retailers have been liberalised by increasing the investment threshold in plant and machinery for the purpose of determining an Indian ‘micro, small and medium industry’ to USD 2 million from the earlier USD 1 million. Also, sourcing from agricultural co-operatives and farmer co-operatives will be counted towards meeting the domestic sourcing requirement criterion. The threshold for ‘micro, small or medium industry’ status will now be taken into account only at the time of the first engagement between the sourcing entity and the retailer and should the sourcing entity outgrow the provided investment threshold, it would not lose its qualification as ‘small industry’, which is a welcome development.
-
In addition to the cities with a population of more than 1,000,000 (per 2011 census), retail sales outlet can now be set up in any city (irrespective of the population) per the decision of the relevant state government.
-
The government has relaxed the requirement of setting up retail outlets. Earlier retailers were not allowed to set up retail outlets in cities having a population of 1,000,000 or less (per 2011 census) in a state that has cities with a population of more than 1,000,000. As per the earlier language of the FDI Policy, the retailers could set up retail outlets in cities having a population of 1,000,000 or less (per 2011 census) only in those states/union territories that did not have any city with a population of more than 1,000,000 (per 2011 census), subject to approval of the concerned state governments / union territories. The state governments have now been granted discretion to allow retail outlets even in cities with a population of less than 1,000,000 (as per 2011 census).
Press Note No. 6 (2013 Series)
This press note covers sectors like Tea including Tea Plantations, Petroleum and Natural Gas, Defense, Courier Services, Telecom Services, Test marketing, Single Brand Product Retail Trading, Assets reconstruction Companies, Commodity Exchanges, Credit Information Companies, Infrastructure companies in security market and Power Exchanges
Tea Sector
The requirement of compulsory divestment of 26% equity in favour of the Indian partner or Indian public within a period of 5 years has been omitted. There is no change in the FDI cap.
Petroleum and Natural Gas
The entry route for present cap on 49% on foreign direct investment in petroleum refining by public sector undertakings (without any disinvestment or dilution of domestic equity in the existing public sector undertaking) has been changed from government approval route to automatic route.
Defence
The 26 per cent FDI cap on defence manufacturing would be under the Government route and beyond 26 per cent the Cabinet Committee on Security (CCS) will take a decision on a case-to-case basis.
Telecom Services
The FDI limit in basic and cellular services in the telecom sector have been revised such that the limit under the automatic route has been hiked to 49 per cent and 49 to 100 per cent under the FIPB route.
Single-Brand Retail Trading
In terms of Press Note 6 (2013 Series), foreign direct investment, up to 49%, in single-brand retail trading is now under the automatic route and foreign direct investment beyond 49% is under the government approval route. Further, earlier only a single non-resident entity (whether owner of the brand or through a legally tenable agreement) was permitted to undertake single brand product retail trading for a specific brand, but now one or more non-resident entities (whether owner of the brand or through a legally tenable agreement) are permitted to undertake single-brand retail trading for a specific brand. The Indian entity carrying out retail trading is required to provide evidence in relation to the ownership or use (by way of a licensing/franchise/sub-license agreement) of the brand to the Reserve Bank of India (in case of a proposal falling automatic route) or the Government of India (in case of a proposal falling under the government route). A list of products/product categories is required to be provided to the Government of India at the time of making the application for government approval. A list of products/product categories (excluding food products is also required to be provided to the Reserve Bank of India in case of proposal falling under the automatic route. Any change in such a list would require intimation to the Reserve Bank of India or prior approval of the Government of India, as the case may be.
Infrastructure company in Securities market
The FDI cap of 49% bas been brought under automatic route instead of Government route
Assets Reconstruction Companies
For Asset Reconstruction Companies, the 49 per cent cap has been brought under the automatic route and from 49 per cent to 100 per cent under the FIPB route.
Credit Information Companies
For credit information companies, the cap under automatic route has been hiked to 74 per cent.
Courier Services
For courier services, the cap has continues to be 100 per cent but entry route changed from Government to automatic route.
Others
In commodity exchanges and power exchanges, the cap has gone up to 49 per cent under the automatic route.