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An estimated 5-minute read

India announces new Foreign Direct Investment Policy, 2017 – 2018

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The ability to attract large scale Foreign Direct Investment (FDI) into India has been a key driver for policy making by the Government. Prime Minister Modi seems to be going along the right track, with India receiving FDI inflows worth USD 60.1 billion in 2016-17, which was an all-time high. Hence, the FDI policy of India has always been closely watched and carefully amended over the years.

On August 28th, 2017, the Department of Industrial Policy and Promotion (DIPP) had issued the updated and revised Foreign Direct Investment Policy, 2017 – 2018 (FDI Policy 2017). The FDI Policy 2017 incorporated various notifications issued by the Government of India over the past year.

Please find below a brief analysis of the key amendments brought by the FDI Policy 2017 to the erstwhile FDI Policy of 2016 and their potential impact on FDI in India:

New Streamlined Procedure for Government Approval

  • Abolition of the Foreign Investment Promotion Board (FIPB): The most significant amendment to the FDI regime has been the institutional change brought by notification dated June 5th, 2017 issued by the Department of Economic Affairs confirming the abolition of the FIPB (the erstwhile government body authorised to approve proposals for FDI requiring government approval); and the introduction of the ‘Foreign Investment Facilitation Portal’ (FIFP), an administrative body to facilitate FDI applicants.
  • Introduction of ‘Competent Authorities’: The FDI Policy 2017 defines and lists sector-specific administrative ministry / department as ‘Competent Authorities’ empowered to grant government approval for FDI. Competent Authorities listed in the FDI Policy 2017 include the DIPP in respect of applications for FDI in the Single Brand, Multi Brand and Food Product retail trading and the Department of Economic Affairs of India for FDI in the financial services sector.
  • Introduction of ‘Standard Operating Procedure’ (SOP) to process FDI proposals: The DIPP had also issued the SOP which sets out a detailed procedure and timeline for applications as well as the list of ‘competent authorities’ for processing government approvals for FDI in India.

Under the SOP, investors are required to make an application on the website of the FIFP, supported by the specified documents which inter alia include relevant charter documents, board resolutions, etc. The application shall then be forwarded to the concerned ‘Competent Authority’ and the Reserve Bank of India (for comments from a foreign exchange law perspective) within 2 (two) days. Proposals requiring security clearance (in sectors such as defence and telecommunication) shall also be forwarded to the Ministry of Home Affairs. The Competent Authority shall process the complete proposal and convey the approval / rejection of such proposal to the applicant in the format prescribed under the SOP.

  • Key provisions likely to benefit applicants with proposals for FDI: Consultation with the DIPP has been made strictly need based, leading to a more streamlined procedure and expeditious timeline (maximum time of 10 weeks) for approval. Moreover, the FDI Policy 2017 also states that the Competent Authority may only reject a proposal, or stipulate conditions in addition to those listed in the FDI Policy 2017 / applicable sectoral laws with the concurrence of the DIPP.

Conversion of Limited Liability Partnership’s (LLPs)

An LLP, operating in sectors/activities where 100% FDI is allowed under the automatic route (without FDI-linked performance conditions), is permitted to convert into a company. Similarly, conversion of a company into an LLP is also now permitted under the automatic route.

Issue of Convertible Notes by Start-ups

  • The FDI Policy 2017 has introduced the issuance of (a) ‘Convertible Notes’ (instruments representing debt repayable at the option of the holder, or convertible into equity shares within 5 years from issue) by Start-ups to persons resident outside India; and (b) equity or equity linked / debt instruments by Start-ups to Foreign Venture Capital Investors.
  • Issuance of Convertible Notes is, however, subject to the following conditions: (a) Under automatic route, a Non-Resident may purchase Convertible Notes for approximately USD 39,500 or more in a single tranche and the consideration shall be received by inward remittance through normal banking channels or as otherwise permitted under the extant foreign exchange regulations applicable; (b) Start-ups engaged in sectors requiring government approval for FDI may issue Convertible Notes only with government approval; (c) Non-Residents may acquire or transfer Convertible Notes from or to persons resident India or Non-Residents only in accordance with applicable pricing guidelines under the Indian foreign exchange regulations; and (d) Start-ups issuing Convertible Notes must comply with reporting requirements prescribed by the Reserve Bank of India.

Revisions to existing provisions of the FDI Policy of 2016

The FDI Policy 2017 also incorporates all Press Notes issued by the DIPP during the course of the year. Set out below are the sector-specific significant amendments brought about in the last year:

  • Manufacturing: To further liberalise the manufacturing sector (which allowed 100% FDI under the automatic route), 100% FDI under government approval route was allowed for retail trading, including through e-commerce, in respect of food products manufactured and/or produced in India.
  • Civil Aviation: The threshold for FDI in existing projects under the automatic route was increased from 74% to 100%.
  • Single Brand Retailing: Sourcing norms applicable for FDI were relaxed and will not be applicable up to 3 (three) years from commencement of the business i.e. opening of the first store for entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible.
  • Other Financial Services: The previously applicable capitalisation norms for non-banking financial services companies were struck off, and all financial sector activities by entities already regulated by financial sector regulators fall under the 100% automatic route of investment, with applicability of sectoral laws.

Some Thoughts

The changes in the FDI Policy 2017 display the efforts of the Indian Government to remove of multiple layers of bureaucracy, and to process proposals for FDI under the government approval route in a more streamlined, positive and expeditious manner. The Government has eased 87 FDI rules across 21 sectors in the last 3 years, opening up traditionally conservative sectors like rail infrastructure and defence. Even India’s agriculture sector has received FDI worth INR 515.49 crore in 2016-17.

The FDI Policy 2017 for the first time makes specific reference to fund raising through convertible instruments by Start-ups, which should encourage fund raising by Indian Start-ups from FVCI’s and Non-Residents. The definition of Start-ups as provided in the Policy is also proposed to be incorporated in the Patents Rules, 2017. The three year relaxation of the local sourcing norms in single brand retail should make it easier for the likes of iconic investors Apple and Tesla to open shop in India. But further details may be needed before the likes of such investors may commit to India.

It is expected that the Government will continue to bring about liberalisation of the FDI regime in India in the months to come. All in all, we intend to maintain our trajectory towards remaining the world’s most attractive destinations for foreign investment.

* The author was assisted by Kunal Savani, Director – Tax, Private Client Practice and Abhilasha Malpani, Associate

Author: Rishabh Shroff
©Cyril Amarchand Mangaldas

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