India: India And (Un) Restricted Foreign Direct Investments In Recent Times


The last two years witnessed a remarkably high activity in the overhaul of India's regulatory framework. Efforts by the government have been increasingly aimed at improvements in the country's Ease of Doing Business ranking and towards increasing investor confidence by striving towards resolution of various legal issues faced by businesses, and simultaneously ensuring certainty in the government's approach. The government in all its endeavours towards making India a global growth engine has laid specific and considerable focus on Foreign Direct Investment (FDI) in the country.

Concerted efforts towards the liberalisation of India's Foreign Direct Investment Policy (FDI Policy) saw a significant increase (of 18%) in FDI in 2016. In 2016, the government seems to have focussed its efforts regarding the liberalisation of the FDI Policy with a view to reduce regulatory supervision and the consequent removal of restrictions on direct foreign investments in the country. The said approach has seen the FDI Policy for most sectors, including the previously highly restricted sectors such as defence and pharmaceuticals gradually move towards permitting direct foreign investment under the automatic route i.e. without government approvals.

At a moment the euphoria around the relaxations introduced in 2016 was settling down, the Government has yet again managed to keep the pot boiling through its announcement in the Union Budget 2017-18 – the government's decision to phase out the Foreign Investment Promotion Board (FIPB), which has evoked strong, albeit mixed reactions from the market.

While the efforts so far seem to be quite promising, to retain its competitive edge, India needs to continue focusing on certain key sectors and work towards ironing out various issues in the FDI Policy related to the compliances/conditionality's associated with investments under the Automatic Route.

Some of the reforms made in key sectors and associated issues since the last year have been discussed below.


Moving from a complete regulation of investments in brownfield projects (as opposed to up to 100% FDI in greenfield projects) in the sector in yester years, a decisive policy change by the government has now permitted up to 74% FDI in brownfield projects under the Automatic Route and beyond 74% under the approval route.

The recent liberalisation of FDI up to 74% under the automatic route in brownfield projects has however come with a number of conditions prescribed by the government – such as reporting of technology transfers upon induction of foreign investment in the investee company, maintenance of the production level of essential medicines, and maintenance of R&D expenditure, alongside other appropriate conditions as may be specified by the government for proposals under the approval route. With the above said conditions in place, the government should consider increasing the limit for investments under the automatic route in brownfield projects to 100%, though at the moment it is most likely that the government is aiming for a phased (complete) liberalisation of the sector.

As more and more specialised players in the Pharmaceutical sector look to enter India, it is imperative that the conditions associated with investments in brownfield projects are detailed and made "exible in nature. At present, one of the key concerns is that in the absence of a clear understanding of compliance of the said conditions, investors and investees may be looking at obtaining specific approvals (including exemptions) from the government, thereby rendering the liberalisation somewhat uncertain from an ease of doing business perspective. Importantly, a drop in India's rank in the Biopharmaceutical Competitiveness Survey commissioned by the Pharmaceutical Research and Manufacturers of America, also remains a cause of worry requiring immediate attention of the government, if FDI in the sector has to be provided a boost.

The medical devices sector, currently classified under Pharmaceuticals is another area with a high potential for FDI. While 100% FDI is already permitted for the manufacturing of medical devices under the automatic route, the government's recent initiative of the introduction of the Medical Devices Rules, 2017, modelled on the Global Harmonisation Task Force's framework, which are to come into force with effect from January 1, 2018 (unless specified otherwise by the government), is another key reform undertaken by the government towards ease of doing business and removal of regulatory bottlenecks.

To capitalize on the broadly positive market sentiment due to the relaxation of the investment limits under the automatic route, it will definitely bode well with the investor sentiment if the government can now also focus on proactively facilitating investor concerns.

Civil Aviation

Consistent with the Civil Aviation Policy, 2016, which aims at inter-alia development of under-used air strips and enhancement of regional connectivity in the country, both greenfield and brownfield airport projects are now eligible to receive 100% FDI under the automatic route. Prior to the recent liberalisation of the FDI Policy, FDI in brownfield projects was restricted to a maximum of 74% under the automatic route.

FDI in scheduled air transport service/domestic scheduled passenger airline and regional air transport service has been permitted up to 100%, with FDI up to 49% under the automatic route, and investments beyond 49% under the approval route. However, investments by NRIs in Air Transport Services sector are permitted up to 100% under the automatic route.

Notably, foreign airlines are yet to be permitted to invest in excess of 49% of the share capital of an Indian airline.

The Prime Minister and the Civil Aviation ministry have off late laid great stress on the expansion of the industry in Tier 1 and Tier 2 cities, and as India is set to grow exponentially into one of the world's largest civil aviation markets, the quantum of investments required for the development of the sector remains astronomical. It is to this end that a complete liberalisation of permissible FDI in the sector should be the next incremental amendment to the FDI Policy.


Liberalisation of permissible FDI in the defence sector has been one of the biggest highlights of the recent changes in the FDI Policy. Up to 49% FDI is now permitted under the automatic route, and up to 100% FDI permitted under the approval route.

Additionally, the government has also sought to do away with the previously existing ambiguity around the condition for having "state of the art" technology for proposals involving FDI of more than 49%. The FDI Policy now stands revised to the effect that proposals showcasing access to modern technology will be favourably considered alongside "exibility of granting approvals for proposals which can demonstrate "other reasons" for allowing investment beyond 49%, which could now potentially open the "ood gates for foreign investment in the sector. Manufacture of small arms and ammunition under the Arms Act, 1959 has also been expressly permitted and included under the revised limits for this sector. FDI in the defence sector has remained notably low, even though major global players have expressed their keen interest in investing in India and with this amendment, this sector is poised to witness positive friction.

For foreign investments in the defence sector to reach India's defence market, it remains all the more important that the conditionalities associated with investments are handled in a further investor friendly manner. At present, under the automatic route, government approval is required where: (i) investment is in a company not seeking an industrial license, and (ii) the investment results in change in the ownership pattern or a transfer of stake by an existing investor to the foreign investor. The issue emanating due to such conditionalities is whether the government wants to continue holding its power of review of all investments, greenfield or brownfield, and the extent to which it will continue to do so. The relevance of permitting up to 49% FDI under the automatic route may not amount to much unless the government can see past prohibitive conditions and look at more practical solutions, such as lock-in obligations on foreign investors entering the sector etc.

With the defence ministry looking to award multiple high value contracts for procurement of defence equipment and technologies, government's pro-investor approach towards the FDI investments in the sector would surely go a long way in realising India's long cherished dream of indigenising India's defence supplies. This should not however be used by the government to put in place even further conditions and additional compliances for foreign investment in the sector, after having opened it up.

Single Brand Retail Trading

Foreign investors' concerns on various conditions that accompany investments under the automatic route in the sector, predominantly on the local sourcing requirements, were handled in the recent round of liberalisation, wherein, the government keeping unchanged the FDI limits of up to 49% investment under the automatic route and investments beyond 49% under the approval route, relaxed the local sourcing norms of 30% for FDI beyond 51% in single brand retail trading, for a period of 3 years, in cases where the products offered have 'state-of-art' and 'cutting-edge' technology and where local sourcing is not possible. The relaxed sourcing norms have been aimed towards benefiting global players seeking to manufacture and market their flagship products in India's enormous consumer goods market. The liberalised FDI Policy for the sector has also earned India the second rank on the 2016 Global Retail Development Index.

Big ticket entrants like Apple and IKEA are now set to enter the Indian market in a grand manner, given the relaxed FDI Policy norms, and it remains to be seen whether in the next phase of liberalisation, FDI of more than 51% (probably up to 74%) would be permitted under the automatic route. Such a change will have a definite compelling effect of convincing global players to form joint ventures in the country without government approval, while local sourcing norms continue to work towards the development of indigenous players, which has been the focus area for the government.

Broadcasting Carriage Services

Up to 100% FDI has been permitted under the automatic route in Teleports, Direct to Home, Cable Networks, Mobile TV, and Headend-in-the-Sky Broadcasting Service (from the earlier limit of up to 49%). The attached conditionalities, however, mandate that a government approval is required in case the 'infusion of fresh FDI beyond 49% results in a change in the ownership pattern or transfer of stake by an existing investor to a new foreign investor in a company not seeking license/permission from the concerned Ministry of the Government of India'. There remains a certain level of ambiguity around the language of the specific condition, and a clarification on this aspect is much needed to provide greater clarity to foreign investors looking to enter or expand in the Indian market. Concerns have been raised by market participants as to whether this condition requires all existing foreign players to obtain a government approval if they seek to get additional foreign investment (aggregating to more than 49%) or in case there is a transfer of stake in such a company to a new foreign investor.

Liberalisation of the FDI limit has been aimed towards providing the cash strapped cable industry with the much needed investment for speeding up its digitisation efforts. With an ever increasing subscriber base and large infrastructure requirements, the potential for growth of investments in the sector remains quite high.

Financial Services

Keeping with the announcement made in the Union Budget 2016-17 that FDI under the automatic route would be permitted in (more than the 18 specified non-banking financial company activities) activities which are regulated by financial sector regulators, the government has now paved the way for FDI under the automatic route, in any non-banking financial company (NBFC) activity that is regulated by a Financial service regulator.

The liberalised norms have also substituted the mandatory minimum capitalization norms prescribed under the erstwhile regime (from USD 500,000 to USD 50 million) with the minimum capitalization norms specified by the concerned regulator/government agency. Financial services related activity which is either not regulated/partially regulated, or there remains a doubt regarding regulatory oversight on such an activity would be covered under the approval route, and the minimum capitalization requirement would be specified by the government. This may be a cause for concern for potential investors in the sectors as after the deletion of the minimum capitalization norms, a potential investor coming under the approval route would be able to get to know the minimum capitalization only upon the receipt of the approval.

The liberalised norms further have the potential to stir M&A activity in the sector, as the minimum capitalization norms are no longer applicable, neither to the first level investment nor to the downstream investment arising upon acquisition of an NBFC by another NBFC (with foreign investment of 75% or less).

Additionally, NBFCs engaged in non-fund-based activities are no longer prohibited from setting up subsidiaries for undertaking other activities or from investing in another company engaged in financial services activities. While the recent change brings along much needed "exibility for FDI in the sector, however, a precise definition/criteria specifying the activities that qualify as financial services or the scope of financial services would be highly beneficial in providing greater clarity to the potential investors.


India continues to remain a bright spot in this phase of a global slowdown, with the World Bank pegging India's GDP growth at 7 and 7.6% for 2016-17 and 2017-18 respectively, despite the doubts emanating post demonetisation. It is therefore imperative that in the long run, foreign investors are engaged for continued extensive periods. To achieve the same, various issues and areas that lack clarity such as the conditions associated with foreign investments under the automatic route and the lack of clarity thereof, for most sectors remain a crucial challenge.

Even though the government has till now shown the best of intentions towards allaying investor concerns, and has been seen to be consistently striving towards providing a world class regulatory infrastructure, the success of all such efforts will be determined by the willingness and the ability of the government to be receptive to the concerns of all stakeholders, foreign and domestic alike. A number of substantive measures remain to be undertaken to improve India's overall investment climate and the country cannot afford complacency of any sort in this regard. While the recent reforms could lead only to a minor improvement in India's position in the World Bank's Ease of Doing Business Rankings (2017), the government has actively showcased its intentions of proceeding with a renewed vigour towards its states of goal of facilitating investor interests and reforming the regulatory setup in the country. The government's decision to phase out the FIPB has also evoked tremendous speculation regarding the future of India's FDI policy and regulations. While, the automatic route is expected to expand even further, there remain some concerns that as against the FIPB (which is seen as a single window clearance channel), in case of sectors where individual ministries have to be approached for approvals (due to a possible decentralisation post the phase out of FIPB), there could be increased uncertainties and inefficiencies. Even though it is too soon to comment on the merits of the decision and its impact, the government would do well by catering to the relevant concerns of investors in the roadmap for FIPB's phase out. Finally, in the midst of the government's approach and renewed efforts towards further consolidation of the regulatory framework and enhancement of investor confidence, a dedicated channel for consultation with the industry and businesses seems to be the only missing wheel.

Originally published in Spring 2017 edition of the U.S. - India Business Council Newsletter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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