Recent Changes In FDI Policy And Its Impact

The Department of Industrial Policy and Promotion on 18 September 2019 issued a press note, Press Note 4 of 2019 (Press Note) amending the consolidated foreign direct investment (FDI) circular of 2017 (FDI Policy). The Press Note was issued further to a press release dated 28 August 2019 (Press Release) issued by the Government of India approving the proposals to amend the FDI Policy in four sectors, namely, coal mining, digital media, single-brand retail trading (SBRT) and contract manufacturing. As per the Press Release, the amendments were introduced in order to liberalise and simplify the FDI policy, provide ease of doing business in India, increase FDI inflows and contribute growth towards investment, income and employment.

The amended FDI Policy would come into effect from the date the Reserve Bank of India (RBI) enacts the necessary amendments. This article sets out a brief overview and impact of the changes proposed.

Coal Mining

Prior to the amendment, the FDI Policy permitted 100% FDI through the automatic route in:

  • coal and lignite mining for captive consumption by iron & steel and cement units, power projects and other eligible activities; and

  • setting up coal processing plants like washeries subject to the condition that such entities are:

  • not allowed to do coal mining, or sell washed coal or sized coal from its coal processing plants in the open market, and

  • only allowed to sell the supply of the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

While there are no changes to the above position, the amendment now allows 100% FDI under the automatic route for any sale of coal (not just sale of coal post processing of such coal), for coal mining (not just for captive consumption) and other associated coal mining activities subject to such activities being carried out in accordance with the provisions of Coal Mines (Special Provisions) Act, 2015 (CMSPA) and the Mines and Minerals (Development and Regulation) Act, 1957.

While the Press Release stated that the idea behind this amendment is to attract international players to create a competitive coal market in India, it may be noted that ever since coal mining opened up to both private and public entities in the CMSPA, till date, there have not been any auctions of coal blocks. Further to the amendments perhaps, the government would now commence with the auctions.

Digital Media

While the FDI Policy does set out provisions with respect to FDI in print media and television channels for news and current affairs, the Press Note adds a provision for 26% FDI in 'uploading or streaming of news and current affairs through digital media' through the government route bringing it in line with FDI in print media.

However, neither the Press Release nor the Press Note defined the term 'digital media' or provide clarity on what would come under the ambit of 'digital media', 'news' or 'current affairs'. It is not known whether 'digital media' would cover digital content aggregators and/or digital intermediaries, who along with non-news media, also aggregate / stream some news and topical digital content. It is also unclear if the underlying intent is to regulate pure aggregators who do not have any influence or control over the content that is aggregated or streamed through such platforms.

Consequently, an entity engaged in digital content and having more than 26% FDI can be considered violating of the FDI Policy if it inadvertently ends up sharing/aggregating digital content which turned out to be 'news'. Further, multiple startups which have come up in digital content and aggregations may now be restricted in their fundraising prospects from foreign investment funds.

It would also hinder structures where the television channels for news and current affairs (which are permitted to receive up to 49% FDI with government approval) also stream news or current affairs online on their own platforms or through other platforms.

On one hand, the changes reflect the government understanding modern ways of doing business, but on the other hand, the ambiguity in terms of loosely setting out 'digital media' reflects otherwise.

Single Brand Retail Trading

The FDI Policy permits 100% FDI in entities engaged in SBRT through automatic route. However, entities having more than 51% FDI are required to procure at least 30% of the value of the goods purchased from India preferably from MSMEs and village industries.

Prior to the amendment, these local sourcing requirements were to be met as an average while also taking into account the global operations for the first five years and were to be met annually and towards its operations in India only. While the local sourcing requirements are still present, the Press Note sets out that for the purpose of meeting the local sourcing requirement, all procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported.

Further, prior to the amendment, the FDI Policy provided for an incremental sourcing requirement which stated that only that part of global sourcing which is over and above the previous year's value was counted towards the local sourcing requirement. However, this requirement has been done away with and now the entire value of the goods procured from India (as against only the incremental value of goods) can be considered towards the local sourcing requirement.

Lastly, the amendment, while the FDI Policy permitted SBRT investee entities to carry out business through e-commerce, the investee entity was required to operate a brick and mortar store prior to commencing e-commerce activities. Whereas now the SBRT investee entity can commence e-commerce activities prior to opening up of a brick and mortar store subject to the condition that such entity opens a brick and mortar store within 2 years of commencing the e-commerce retail.

The relaxations would enable foreign investors to better meet the sourcing requirements and also benefit local manufacturing and exports. However, while it can be argued that the restrictions on the foreign investors in SBRT are justifiable, there is still scope for more reforms.

Contract Manufacturing

Prior to the amendment, the FDI Policy permitted 100% FDI in Indian entities in the manufacturing sector through the automatic route. However, there was no provision which specifically permitted contract manufacturing in the FDI Policy. The Press Note clarifies that manufacturing activities may be conducted by self-manufacturing by the investee entity or contract manufacturing in India through a legally tenable contract whether or principal to principal or principal to agent basis.

Manufacturers are permitted to sell the manufactured product in India through wholesale and/or retail, including through e-commerce.

However, the Press Note does not provide the meaning of the term 'contract manufacturing' or the tests that would qualify an activity within contract manufacturing. Further, it also does not set out the meaning of a 'contract manufacturer' and there is ambiguity in respect of whether the investee entity:

  • can outsource its manufacturing to another entity and does that contractor entity need to be Indian; or

  • can it undertake contracts and be a contract manufacturer and manufacture on contract from other entities.

Further, an interesting aspect that can now arise is that a global retailer having an Indian SBRT Indian entity can now also set up a manufacturing entity and through a contract manufacturer fulfil the 30% domestic sourcing requirement. This could be beneficial for global retailers who are not themselves manufacturers but follow a model of procuring through contract manufacturers, such as apparel and electronic brands. However, they would need to manufacture those products in India. If such global retailers would be open to having their products contract manufactured in India, it can enable to them to then:

  • control the quality and supply and protect the intellectual property of the brand; and

  • sell the manufactured products through retail or to their Indian SBRT entity.

While it may be argued that such sourcing may not satisfy sourcing from MSMEs, village and cottage industries, artisans and craftsman, however, such condition, as per the FDI Policy is not mandatory but is only 'preferable'.

Also, given that there have been no government approvals for foreign multi-brand retailers have been approved in the past years, the foreign multi-brand retailers also now have the option to set up a manufacturing entity instead, undertake contract manufacturing and sell those manufactured products directly through retail/e-commerce/wholesale.

Conclusion

From an overall perspective, the amendments in the FDI Policy are a welcome move as it supports to make India an attractive destination for foreign investment in the concerned sectors. However, the Press Note merely adopted the proposals introduced by the Press Release and did not provide clarity to the proposals especially with respect to categories of the digital media players that are intended to be regulated and the test for or the constituent elements of contract manufacturing. It is unlikely that the RBI notification would provide any additional clarity.

For any clarification or further information, please contact

Gaurav Wahie
Partner
E: gaurav.wahie@clasislaw.com

Jaydeep Bhambhani
Senior Associate
E: jaydeep.bhambhani@clasislaw.com

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