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LexCognito

This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.


Date: 29 August 2019
Foreign Direct Investment – Important Regulatory Relaxations
The Union Cabinet of Government of India, in its meeting held on 28 August 2019, has approved a proposal for review of Foreign Direct Investment (FDI) Policy on various sectors. The proposals are aimed at liberalizing and simplifying the FDI Policy to promote ease of doing business in the country, attracting more FDI inflows and enhancing growth of investment, income and employment.

The Union Cabinet has noted larger inflows of FDI into India during the last five financial years as compared to the FDI received in the five-year period prior to that. In fact, the total FDI received in the financial year 2018-19 has been estimated to be approx. US $ 64.37 billion which is the highest ever FDI received in any financial year. The Union Cabinet has also noted the important fact of a sharp decline in Global FDI inflows. The Union Cabinet noted that as per United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2019, the Global FDI inflows have declined by 13% in 2018 and this decline is in continuation to the decline in the previous years. Thus, despite global decline in FDI inflows, India continues to remain a preferred and attractive destination for global FDI inflow, whereas the Union Cabinet observed that India has the potential to attract far more FDI if the present FDI Policy regime is further simplified.

The present Finance Minister, in the Union Budget 2019-20, had also mentioned that the Government would be taking measures to make India a more attractive FDI destination. 

The changes proposed by the Union Cabinet are summarized as follows:

Contract Manufacturing
  1. The present FDI Policy does not incorporate any specific provision for contract manufacturing, even though 100% FDI under automatic route is permitted in manufacturing sector.  In order to provide clarity, it has been proposed that the FDI Policy will permit 100% FDI under automatic route in contract manufacturing.
  2. It has been proposed that the manufacturing activity may be conducted either by the investee entity receiving FDI or through contract manufacturing in India under a legally tenable contract, whether on Principal to Principal or Principal to Agent basis.  This aspect is expected to be clarified in detail in the FDI Circular to be issued to implement this announcement.   
Single Branded Retail Trading (SBRT)
  1. The extant FDI Policy provides that 30% of value of goods has to be procured from India if SBRT entity has more than 51% FDI. Further, such local sourcing requirements are permitted to be met as an average during the first 5 years and, thereafter, annually towards India operations of the SBRT entity. With a view to provide greater flexibility and ease of operations to SBRT entities, it has been decided that 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, the current cap of considering exports for 5 years only is proposed to be removed, to give an impetus to exports.
  2. The present FDI Policy provides that incremental sourcing for global operations by the non-resident entities undertaking single brand retail trading, either directly or through their group companies, will also be counted towards fulfillment of local sourcing requirement for the first 5 years. It has been noted however that prevalent business models involve not only sourcing from India for global operations by the SBRT entity or its group companies but also through an unrelated third Party done at the behest of the SBRT entity or its group companies. Therefore, it has been decided that 'sourcing of goods from India for global operations' can be done directly by the entity undertaking SBRT or its group companies (resident or non-resident), or indirectly by them through a third party under a legally tenable agreement. The ensuing FDI Circular may incorporate more clarity on this aspect.
  3. At present, only that part of the global sourcing is counted towards fulfillment of local sourcing requirements which is over and above the previous year's value. The Government has recognized that such requirement of year-on-year incremental increase in exports induces aberrations in the system as companies with lower exports in a base year or any of the subsequent years can meet the current requirements, while a company with consistently high exports gets unduly discriminated against. It has been now decided that entire sourcing from India for global operations shall be considered towards fulfillment of local sourcing requirements instead of merely taking annual incremental values into account.
  4. The present policy requires that SBRT entities have to operate through brick and mortar stores before starting retail trading under the brand through e-commerce. The Union Cabinet has now permitted the SBRT entities to undertake retail trading through online trade prior to opening of brick and mortar stores subject to the condition that such an entity sets up brick and mortar stores within two (2) years from date of start of online retail trade.
Digital Media

At present 49% FDI under approval route is permitted in Up-linking of 'News &Current Affairs' TV Channels. It has been 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

The present FDI policy allows 100% FDI under automatic route in coal & lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities permitted under and subject to applicable laws and regulations. Further, 100% FDI under automatic route is also permitted for setting up coal processing plants like washeries subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

It has been decided to permit 100% FDI under automatic route for sale of coal, for coal mining activities including associated processing infrastructure subject to provisions of Coal Mines (special provisions) Act, 2015 and the Mines and Minerals (development and regulation) Act, 1957 as amended from time to time, and other relevant acts on the subject. "Associated Processing Infrastructure" would include coal washery, crushing, coal handling, and separation (magnetic and non-magnetic).

The aforesaid proposals are important steps towards government’s sincere efforts to uplift the Indian economy. It is expected that the circular to be issued by the Government of India to implement the proposed changes in the FDI Policy would incorporate adequate clarity on various unresolved issues posed by the above proposals.

 
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