Radical changes in the Foreign Direct Investment regime

The reforms introduced to the Consolidated FDI Policy of 2016 by way of Press No. 5 (2016 Series) as issued by the Department of Industrial Policy & Promotion include increase of sectoral caps, bringing more sectors under the automatic route and easing of conditionalities for foreign investment.

Following are the key highlights of the reforms.

Defence sector
The erstwhile FDI regime permitted 49 percent FDI under the automatic route and FDI above 49 percent was permitted through approval route on a case to case basis wherever it was likely to result in access to modern and ‘state-of-art’ technology.

Now, foreign investment beyond 49 percent has been permitted through approval route in cases resulting in access to modern technology in the country or for other reasons to be recorded. The condition of access to ‘state-of-art’ technology in the country has been done away with.

Pharmaceutical sector
The erstwhile FDI policy permitted 100 percent FDI under the automatic route in greenfield pharma and FDI upto 100 percent under approval route in brownfield pharma. It has now been decided to permit up to 74 percent FDI under automatic route in brownfield pharma, and approval route beyond 74 percent would continue.

Civil aviation sector
The former FDI policy permitted 100 percent FDI under the automatic route in greenfield airport projects and FDI upto 74 percent under the automatic route in brownfield airport projects, with FDI beyond 74 percent being under the approval route. It has now been decided to permit 100 percent FDI under automatic route in brownfield airport projects. Further, it has been decided to permit FDI up to 100 percent in scheduled air transport service/ domestic scheduled passenger airline and regional air transport service, with FDI up to 49 percent being permitted under automatic route and FDI beyond 49 percent through approval route.

Food products
For promoting food products manufactured or produced in India, it has been decided to permit 100 percent FDI under approval route for trading activity, including through e-commerce.

Private security agencies
The erstwhile FDI policy permitted 49 percent FDI under approval route, however, now FDI upto 49 percent is permitted under automatic route, and FDI beyond 49 percent and up to 74 percent would be permitted under approval route.

Animal husbandry
The policy continues to allow 100 percent FDI in animal husbandry, however, the requirement of ‘controlled conditions’ has been done away with.

Establishment of branch office, liaison office or project office
To establish a branch office, liaison office or project office or any other place of business, if the principal business of the applicant is defence, telecom, private security or information and broadcasting, the approval of Reserve Bank of India or separate security clearance would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted.

Single brand retail trading
As per the erstwhile FDI policy, sourcing of 30 percent of the value of goods purchased was required to be achieved from India (preferably from MSMEs, village and cottage industries, artisans and craftsmen) in respect of proposals involving FDI beyond 51 percent. This procurement requirement was required to be met, in the first instance, as an average of five years’ total value of the goods purchased, beginning April 1st of the year of the commencement of the business. It has now been decided to relax local sourcing norms up to three years and a relaxed sourcing regime for another five years for entities having ‘state-of-art’ and ‘cutting edge’ technology.

Conclusion
The Government seems to be confident that the FDI reforms will result in growth and employment generation, and that these changes should not only dispel doubts in the minds of investors but should also revive employment hopes.

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