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Alerts:

Regulatory Alert: Amendments to Foreign Direct Investment (FDI) Policy

30 August 2019

The existing foreign direct investment (FDI) policy of India prescribes guidelines in relation to foreign investment in various sectors / activities. In order to give further impetus to the FDI inflows, the Union Cabinet, on 28 August 2019, has approved certain amendments in FDI policy in several sectors viz. Single Brand Retail Trading (SBRT), contract manufacturing, digital media (i.e. uploading/ streaming of News & Current Affairs) and coal mining.

The key highlights of amendments in FDI Policy are summarised below:

Single Brand Retail Trading (SBRT)

As per existing FDI policy, 100% FDI is allowed under automatic for SBRT activity. However, there are various conditions that need to be fulfilled. The Government has relaxed some of these conditions to attract more FDI for SBRT activities in India:

1. Local sourcing norms

The existing FDI policy provides that in respect of the SBRT entity having more than 51% FDI, the sourcing of 30% of value of goods purchased, must be done from India only. In this regard, SBRT entity is permitted to set off its incremental sourcing of goods (by non-residents undertaking SBRT in India either directly or through their group companies) from India for global operations against the mandatory 30% local sourcing requirement during initial five years only. Subsequent to five years, the SBRT entity is required to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis.

With regards the above, the Government has now proposed to relax these conditions as under:

  • Local sourcing for domestic as well as export sales by SBRT entity: All the 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 and the same would apply even beyond initial five years
  • Incremental sourcing vs. Year on year sourcing: As per extant policy only that part of the global sourcing is considered for abovementioned set off towards local sourcing requirement which is over and above the previous year's value i.e. only incremental sourcing is considered for set off against local sourcing requirements. The Government has now decided entire (and not the incremental) sourcing from India for global operations shall be considered towards local sourcing requirement.
  • Direct and Indirect sourcing: It has also been decided that the global sourcing would cover sourcing of goods from India for global operations not only by non-residents undertaking SBRT in India either directly or through their group companies (resident or non-resident) but also by an unrelated third party, done at the behest of SBRT entity or its group companies under a legally tenable agreement.

‚Äč2. E-commerce

As per the existing policy, SBRT entity must operate through brick-and-mortar stores before starting retail trading of that brand through e-commerce. However, the Government has now decided to allow retail trading through online trade prior to opening of brick-and-mortar stores, subject to the condition that the SBRT entity opens brick-and-mortar stores within two years from date of start of online retail.

Contract Manufacturing

In the existing FDI policy, 100% investment is permitted in the manufacturing sector under the automatic route. The policy also allows manufacturers to sell products manufactured in India through the wholesale and retail channels, including through e-commerce, without the Government’s approval. However, in the policy, there is no specific mention of Contract Manufacturing and thus, to provide more clarity to this, the Government has decided to allow 100% FDI under automatic route in “Contract Manufacturing” in India.

Digital Media

As per the existing FDI policy, 26% FDI under Government approval route is allowed in the print media sector and 49% FDI under Government approval route is allowed in broadcasting content services sector such as Up-Linking of ‘News & Current Affairs’ TV Channels. However, the present FDI policy is silent on the digital media segment. Accordingly, the Government has now decided to permit 26% FDI under Government route for uploading/ streaming of News & Current Affairs through Digital Media, on the lines of print media.

Coal Mining

In the existing FDI policy, 100% FDI under the automatic route is allowed for coal and lignite mining for captive consumption by power projects as well as iron & steel and cement units. 100% FDI is also permitted for setting up processing plants like washeries with condition that the company shall not do coal mining or sell the washed or sized coal in the open market and they must supply the processed coal to those who are supplying raw coal to them. The Government has now decided, to allow 100% FDI under automatic route, for sale of coal and coal mining activities including coal Associated Processing Infrastructure, subject to relevant regulations on the subject of Associated Processing Infrastructure, which would include coal washery, coal crushing, coal handling and coal separation (magnetic and non-magnetic).

BDO Comments

The slew of measures and relaxations announced is another attempt by the Government to give fillip to the economy, attract foreign investment and create employment. From amongst the measures announced, the relaxation on FDI conditions relating to SBRT activities (especially the local sourcing norms) will certainly induce more global players to set-up stores in India. At the same time, the Government has also tried to utilise this relaxation to give boost to the exports from India. Identifying the contract manufacturing as a separate activity with 100% FDI permitted under automatic route clears air around this and should lead to increased manufacturing activities and support ‘Make-In-India’ programme. Permitting FDI in commercial coal mining is likely to attract global miners, thereby creating a competitive and efficient domestic coal market. Lastly, introduction of 26% FDI in digital media in news and current affairs could be perceived as a restriction as against relaxation since at present there is no specific restriction or condition for FDI in said activity, albeit one will have to wait for fine print once the relevant change is notified.