facebook-page-view
Advertisement

How recent rule changes will impact foreign investment inflows across sectors

How recent rule changes will impact foreign investment inflows across sectors
Hemang Parekh, Sanket Jain, and Ishita Luthra

Foreign direct investment (FDI) plays a key role in the economic growth of a country. Currently, the FDI regime in India is regulated by the Consolidated FDI Policy, 2017, along with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, (TISPRO).

Over the years, the government of India has amended the FDI Policy and TISPRO to liberalise and permit up to 100% FDI in most sectors under the automatic route. This has resulted in increased FDI inflows into the country.

Total FDI inflows rose to an all-time high of $60.08 billion in 2016-17 from $55.46 billion in 2015-16 and $45.15 billion in 2014-15, as per a press release dated 10 January 2018.

Advertisement

Recently, on 26 March, the Reserve Bank of India notified the TISPRO Amendment Regulations. The amendment resulted in significant changes being made in certain sectors which will favour foreign investments and further improve the ease of doing business in India. Some of the key amendments are as follows:

Single-brand product retail trading

This refers to the selling of goods under a single brand name. For example, if a foreign entity were to sell the products of its flagship brand in India, these products could be sold through retail outlets under the flagship brand only. In 2012, the government liberalised the single-brand retail sector and permitted 100% FDI under the government approval route. In 2014, the government further liberalised FDI in this sector and permitted up to 49% FDI under the automatic route, and beyond 49% under the government approval route.

Advertisement

The TISPRO Amendment has relaxed FDI in this sector by permitting 100% FDI under the automatic route. In addition, the mandatory condition of importing 30% of the value of total goods purchased by the single-brand retail entity, i.e. sourcing requirement being from India, is now to be met in an incremental proportion over the initial period of five years, beginning from April 1 of the year of the opening of the first store.

However, after completion of the five-year period, such an entity would be required to achieve 30% of the local sourcing requirement directly for an Indian entity annually.

This is a welcome step taken by the government as it promotes the ease of doing business in the single-brand retail trading segment and will provide a momentum for growth in the retail industry. Also, by relaxing the sourcing norms, a level-playing field has been created for foreign investors and will attract large retail groups to enter India.

Advertisement

Real estate broking services

As per the FDI Policy and TISPRO, 100% FDI under the automatic route is permitted in the construction development sector. The FDI Policy and TISPRO make a clear distinction between the ‘real estate business sector’ and ‘the construction development sector’, and specifically prohibits FDI in the former.

Under the FDI Policy and TISPRO, ‘real estate business’ has been defined as dealing in land and immovable property with a view to earning profit from it and does not include the development of townships, construction of residential or commercial premises, roads or bridges, educational institutions, recreational facilities, and city and regional infrastructure.

Advertisement

The TISPRO Amendment has clarified that real estate broking services do not constitute real estate business and permits 100% FDI under the automatic route in the sector.

Real estate broking services operate across all segments of the property market—new projects, sales, resales, rentals, commercial property, paying guests, plots, etc. Under the TISPRO Amendment, there are no specific criteria or requirements regarding qualifications or registration for one to qualify as a real estate broker. With the introduction of the Real Estate (Regulation and Development) Act, 2016, and this notable change in the TISPRO Amendment, the real estate broking services sector is likely to become more organised and receive a boost through the flow of foreign capital.

Medical devices

Advertisement

The FDI Policy and TISPRO permit up to 100% FDI under the automatic route for manufacturing of medical devices. The definition of ‘medical device’ under the FDI Policy and TISPRO was subject to the Drugs and Cosmetic Act, 1940 (Drugs Act). Under the amendment, the definition of medical devices is no longer subject to the Drugs Act.

Further, the Medical Device Rules, 2017, issued under the Drugs Act, restricts the definition of ‘medical devices’ to cover only 15 categories of devices. The TISPRO Amendment widens the range of items that may be categorised as medical devices, enabling a company in the space to attract FDI of up to 100% under the automatic route.

Air transport services

The FDI Policy and TISPRO allowed foreign airlines to invest in the capital instruments of Indian companies, operating scheduled and non-scheduled air transport services, up to 49%. The TISPRO Amendment permits FDI up to 100%, wherein up to 49% is permitted under the automatic route and beyond 49% is permitted under the government approval route.

Previously, the sectoral cap of 49% was not applicable for FDI in Air India Ltd, thereby implying that foreign airlines could not invest in the state-run carrier. However, given the government’s decision to divest its stake in Air India, FDI up to 49% is now permitted in the airline, subject to: (i) FDI in Air India does not exceed 49%, whether directly or indirectly; and (ii) substantial ownership of Air India continues to be vested in Indian nationals.

This TISPRO Amendment allows other domestic carriers, jointly with foreign partners, to strengthen their financial and technical capabilities.

Regulation 16(B)(5) of TISPRO permitted FDI into an Indian company engaged only in the activity of investing in the capital of other Indian entity(ies), with prior government approval. A core investment company (CIC) was required to additionally follow the regulatory framework for CICs laid down by the RBI.

The TISPRO Amendment permits 100% FDI under the automatic route in an Indian company registered as a non-banking financial company (NBFC) with the RBI.

However, government approval would be required for FDI in: (i) an Indian company that is engaged in the business of investing in the capital of other Indian entities and not registered with the RBI as an NBFC, and (ii) a CIC which is engaged in the business of investing in the capital of other Indian entities.

These changes promote the ease of doing business in India. If a particular entity is already regulated by the RBI, then reasonably, it should not be regulated by any other regulator. This will ensure saving of cost and time of the foreign investor, thus, attracting investments.

Issue of capital instruments

Under Schedule 1 of TISPRO, issue of capital instruments by an Indian company to a person residing outside India was allowed only through a swap of capital instruments, if the Indian investee company was engaged in a sector falling under the automatic route. However, government approval was required if capital instruments were to be issued against:

  • Swap of capital instruments, if the Indian investee company was engaged in a sector falling under the government route; or
  • Import of capital goods/ machinery/ equipment (excluding second-hand machinery) subject to compliance with the conditions specified by the government and the RBI from time to time; or
  • Pre-operative/ pre-incorporation expenses (including payments of rent etc.), subject to compliance with the conditions specified by the government and the RBI from time to time.
  • Pursuant to the TISPRO Amendment, capital instruments may be issued by an Indian company to a person resident outside India against the above three options without government approval, if the Indian investee company is engaged in an automatic route sector and complies with the conditions as may be prescribed by the government and the RBI from time to time.

    However, the government’s approval would be required if the Indian investee company is engaged in a sector falling under the government approval route.

    This is a welcome change as there are various options available in the automatic route against which the shares can be allotted by an Indian investee company. This will allow investee companies to settle payments with respect to capital goods, machinery and equipment with the person resident outside India by issuing its capital instruments. This will also allow foreign companies to incorporate subsidiaries in India by issue of capital instruments against pre-incorporation expenses.

    Conclusion

    The TISPRO Amendment has introduced significant changes to the foreign exchange laws and liberalising certain sectors to influence foreign investment in India, especially allowing 100% FDI in single-brand retail trading and NBFCs registered with the RBI.

    Also, issue of capital instruments through modes (under the automatic route) other than swap of capital instruments will significantly reduce the transaction time and is a step towards streamlining the procedure for foreign investment.

    Hemang Parekh, Sanket Jain, and Ishita Luthra are partner, principal associate, and senior associate, respectively, at Mumbai-based law firm DSK Legal.

    Like this column? Sign up for our daily newsletter to get our top reports.

    Share article on

    Advertisement
    Advertisement