Over the past few years, the Narendra Modi led government has been actively liberalizing foreign direct investment routes, with the intention of further easing the foreign direct investment regime in India by liberalizing and simplifying the FDI Policy in order to promote ease of doing business in India. The present set of reforms introduced by the government, by way of Press Note 1 of 2018, comes in the backdrop of the World Economic Forum, in Davos, where the Indian delegation, led by Prime Minister Modi, is actively engaged in building optimism and generating further interest amongst foreign investors.
The announcement of allowing 100% FDI in the single brand retail (SBRT) sector, and the tweaks made to local sourcing norms may entice such global retailers, who are yet to set shop in India. The revised norms will permit entities undertaking SBRT and having FDI in excess of 51% to off-set additional global sourcing (above current levels) to satisfy the local sourcing norms. This is a welcome step, especially for the apparel industry, as a number of brands presently source products from India for their global operations. If such brands increase their sourcing for global operations from India, such increased sourcing can be set off against the requirements under the local sourcing norms. The revised norms will also make it easier for foreign brands to incorporate wholly owned subsidiaries in India, without tying up with any local Indian partner, and will thus enable them to exercise greater control over their business in India.
The move to allow foreign airlines to invest in Air India also comes at a juncture when the government is in the process of finalizing the modalities for the cash-strapped and loss-making Air India, and is a clear indication of the intention of the government in getting competitive bids for Air India.
In relation to the construction and development sector, the government has clarified that real estate broking does not amount to real estate business and is therefore, eligible for 100 per cent FDI under automatic route. Similarly, the government has also eased rules for foreign investment in power exchanges, allowing FIIs/FPIs to invest in Power Exchanges through primary market as well, and has also permitted issuance of shares against non-cash consideration like pre-incorporation expenses, import of machinery, without requiring government approval for sectors under the automatic route. Further changes in the FDI policy, including clarifications on the FDI policy on sectors involving foreign investment in an Indian company that is engaged only in the activity of investing in the capital of other Indian company/ies/ LLP, with FDI policy provisions on Other Financial Services, are significant steps to reduce red-tape.
However, surprisingly, amidst all the positive steps taken by the government, the government has announced restrictions with respect to appointment of auditors for auditing Indian investee companies, and now, if the foreign investor wishes to engage an audit firm having an international network, the audit of Indian investee companies should be carried out as joint audit, wherein one of the auditors should not be part of the same network. This is a surprising move on part of the government since the rationale for imposition of the abovementioned conditions is not clear and this may increase the cost of doing business in India if a foreign investor wishes to use its global auditor to audit its Indian subsidiary.
Nevertheless, as a whole, the reforms introduced by the government will certainly improve sentiments amongst foreign investors and are in line with the steady stream of reforms being introduced to liberalise the FDI regime and attract more foreign investment.
This article was originally published in Firstpost.
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