FDI Policy Update: FDI Reforms (August 2019)

Introduction

On August 28th, 2019 the union cabinet approved changes to the foreign direct investment (“FDI”) policy in four sectors (“Approved Proposal”). The purpose of these changes is to make India a more favorable destination for global investors.

Coal Mining Sector

The automatic route under the existing FDI policy for mining coal was restricted to captive consumption by companies operating power projects, iron and steel, and cement units. This extended to coal processing plants like washeries but they were only permitted to sell it back to the coal companies that were supplying these for processing and not in the open market.

The Approved Proposal has now brought sale of coal, for coal mining activities including associated processing infrastructure (coal washery, crushing, coal handling, and separation) under the 100% automatic route, subject to the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957.

Contract Manufacturing

The current FDI policy permitted 100% foreign direct investment in the manufacturing sector under the automatic route although separate provisions had not been carved out for contract manufacturing. The Approved Proposal now extends this to contract manufacturing activities, carried out either through the investee entity or through contract manufacturing by way of contracts, which may be on a principal to principal or principal to agent basis.

Digital Media

49% FDI is permitted currently under the approval route in up-linking of news and current affairs TV Channels. The Approved Proposal permits FDI in digital media up to 26% under the government route for uploading or streaming of news and current affairs through digital media.

Single Brand Retail Trading

FDI up to 51% was permitted under the current FDI Policy for single-brand retail trading subject to 30% being sourced from the Indian market (“local sourcing requirement”). This procurement requirement had to be shown as an average of the first five years and annually for the subsequent years. The local sourcing requirement has been relaxed for these single-brand retailing entities not in terms of the percentage cap but by expanding the scope of what local sourcing would entail through the following changes:

  • Irrespective of whether the goods procured by an entity attracting FDI are sold in India or exported, all procurements are to be counted towards local sourcing.
  • The limit on considering exports towards the local sourcing requirement of such an entity only for five years has been done away with.
  • Local sourcing through third parties under a contract will also be considered towards the local sourcing requirement.
  • Previously, only that part of the global sourcing of a single brand retailing entity which was over and above the previous year’s local sourcing value was counted towards the local sourcing requirement. This requirement of annual incremental increase has been removed and thus effectively, the entire scale of local sourcing done by an entity is counted towards the local sourcing requirement.
  • E-commerce companies were earlier required to have a brick and mortar store before engaging in retail trading of their brands online. Through the Approved Proposal, a breather has been given to single-brand retailing entities with a window period of two years to set up brick and mortar stores after commencing an online retail business.

Implications

The overarching intent is towards promoting business in India for foreign investors.

The ease of restrictions under the coal mining sector and contract manufacturing, while appreciable, may take a while for real impact. Finer details for the 26% FDI in digital media will determine if this is indeed a reform.

A welcome move for global single-brand retailing companies, the likes of Apple, IKEA, and others. The Government has done a fine balancing act while ensuring that local sourcing requirements are not reduced but merely expanded to include prevailing indirect domestic manufacturing components. The easing of the requirement to set up brick and mortar stores by e-commerce companies is a consumer-centric move, which was long-awaited.

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