While acknowledging the contribution made by Foreign Direct Investment (FDI) in the economic, investment, employment and income growth, to promote the ease of doing business in India and to exploit the potential of attracting more investment, Union Cabinet under the chairmanship of Prime Minister Shri. Narendra Modi has approved amendments in FDI Policy.
There are huge opportunities available specifically in the rural economy, which are yet to be explored, have been made available to the foreign investors. The rural economy signifies roughly 46% of the national income and constitutes the two-third of the population of India. Therefore, it is imperative to explore the vast market for overall growth and development of the country.
Such laudable move was made ahead of Prime Minister's visit to Davos, Switzerland for World Economic Forum (WEF) who was second Prime Minister to address the delegates in twenty years after Shri. HD Deve Gowda in 1997.
100% FDI is now permitted in Single Brand Retail Trading (SBRT)
The Central Government has relaxed the FDI norms in Single Brand Retail Trading (SBRT). The provisions with regard to SBRT are given under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 read with the Consolidated FDI Policy, amended by the Government of India from time to time.
The erstwhile FDI policy for SBRT allowed 49% foreign investment to be made in capital instruments under automatic route and for foreign investment to be made in capital instruments beyond 49% to 100% was through Government approval route. The new FDI policy has removed the hindrance of obtaining the Government approval by allowing 100% foreign investment under automatic route.
In addition to this removal of cap, following relaxations have also been given:
- The mandatory condition of importing 30% of the value of total goods purchased by SBRT entity, i.e. sourcing requirement, must be from India, has been relaxed.
- The target of achieving 30% of local sourcing can be achieved in an incremental manner over a period of 5 years.
- Any local sourcing, over and above the existing local sourcing by any group company/ investors from India shall be treated as incremental sourcing which shall reckoned towards 30% local sourcing.
- First year will be counted from April 1 of the year in which the entity opens its store.
- However, after completion of 5 years period, such entity will be required to achieve 30% local sourcing requirement directly for its Indian entity annually.
The incremental sourcing is explained as the increase in terms of value of goods imported from India in a financial year of the single brand over preceding financial year. To ascertain the sourcing requirement for an entity, the Indian entity which is the receiver of foreign investment would be the relevant entity. This leeway is for the non-resident entities which are undertaking single brand retail trading entity, directly or through their group companies. The condition of sourcing from India i.e. 30% of goods purchased has to be certified by the statutory auditors of the entity.
For instance, a non-resident entity opens a SBRT entity in India; let's assume from May, 2018, the first year will be counted from April 1st of the year the first store is opened. Now, this relaxation will be available to the entity for next five years which will be till March 2023 wherein the value of sourcing from India should gradually reach to 30% of the total goods purchased by them. Thereafter, from the sixth year i.e. from April, 2023, the SBRT entity shall have to meet the 30% of local sourcing norms.
This clarification coupled with other policy decisions of the Government is a welcome step. The Government has created a level playing field to foreign investors and now it is for foreign investors to enter into the Indian market and take advantage of a booming economy.
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