India: FDI Policy Reform Proposals Approved In An Effort To Boost Economic Growth

Last Updated: 9 September 2019
Article by SKP  

With a Government that has achieved a significant momentum for legal and policy reform, Foreign Direct Investment (FDI) is the next area of focus. FDI is a significant driver of economic growth and a source of non-debt financing for the economic development of the country. The Union Cabinet, chaired by the Prime Minister has approved the proposal for the review of the Government policy on FDI in various sectors. This makes India a more attractive FDI destination, leading to benefits of increased investments, employment, and growth.

On 28 August 2019, the Commerce Minister proposed reforms in FDI Policy of the Government in the sectors described below. These reforms are yet to be notified and would be confirmed in the revised FDI policy and notifications released by the RBI.

Coal Sector

The Ministry has now decided to permit 100% FDI under the 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).

Contract Manufacturing

The Manufacturing Sector has 100% FDI allowed under the automatic route. However, there are no specific provisions for contract manufacturing in the Policy. Hence, to provide clarity, the Ministry has decided to specifically include contract manufacturing under 100% Automatic route FDI.

The investee entity would be able to manufacture through contract manufacturing in India under a legally tenable contract, whether on Principal to Principal or Principal to Agent basis.

Single Brand Retail Trading (SBRT)

The current FDI Policy allows 100% FDI under the automatic route. However, the SBRT entity proposing to have FDI of more than 51% will have to comply with the following sourcing norms:

  • 30% of the value of goods will have to be procured from India
  • This procurement requirement would have to be met, as an average during the first five years, and thereafter annually
  • The procurement norm would have to be met towards its India operations only
  • For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, receiving the foreign investment (incorporated in India)
  • The SBRT entity is permitted to set off its incremental sourcing of goods from India for global operations during the first five years, beginning 1 April of the year of the opening of the first store. For this purpose, incremental sourcing shall mean an increase in the value of such global supply from India for that single brand (in INR terms).
  • An SBRT entity operating through brick and mortar stores is only permitted to undertake retail trading through e-commerce.

The ministry has now proposed to ease above sourcing norms as follows:

  • 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 five years only is proposed to be removed, to give an impetus to exports.
  • 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 of companies (resident or non-resident), or indirectly through a third party, under a legally tenable agreement to ease the burden on the Indian SBRT entity.
  • It has been now decided that entire sourcing from India for global operations shall be considered towards local sourcing requirement without any incremental value. This would relax the conditions for the entities having high exports from the very first year.
  • Retail trading through online trade can also be undertaken before the opening of brick and mortar stores, subject to the condition that the entity opens brick and mortar stores within two years from the date of start of online retail.

Digital Media

The extant FDI policy provides for 49% FDI under the approval route in Up-linking of 'News & Current Affair' TV Channels. 26% FDI under government route for uploading/streaming of News & Current Affairs through Digital Media, on the lines of print media, has now been permitted.

SKP's Comments

Over the years, the Government has been progressively relaxing the FDI Policy in several sectors, and has allowed FDI up to 100% on the automatic route in most sectors/activities to attract foreign investment. This includes the Defense, Construction Development, Trading, Pharmaceuticals, Power Exchanges, Insurance, Pension, Other Financial Services, Asset reconstruction Companies, Broadcasting, and Civil Aviation sectors. This time, the Government has further made an effort in the four sectors described above.

The Single Brand Retail Sector, in particular, is important to spur the growth of the otherwise slowing down the economy. Proposed reforms like relaxing the conditions for the calculation of sourcing cap would provide greater flexibility and ease of operations to SBRT entities and stimulate exports. The allowance of online trading without having retail stores, which is a dire need in this time, aims to increase online sales, which in turn, would create jobs in logistics, digital payments, customer care, training, and product skilling.

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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