Introduction

On November 10, 2015, the eve of Diwali, the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion (“DIPP”) issued a Press Note to introduce Foreign Direct Investment (“FDI”) reforms and liberalisation in regards to 15 major sectors of the economy including defence, banking, construction, single brand retail, broadcasting and civil aviation, with an aim to boost the investment environment and bring in more foreign investments in the country.

As a follow-up to the Foreign Direct Investment (“FDI”) policy changes announced by the Government vide Press Release dated November 10, 2015, the DIPP has released Press Note 12 of 2015 notifying the amendments to FDI Policy effective November 24, 2015.

This article, being the second part of these series of “Reforms in Foreign Direct Investment Policy” will give you a detailed understanding of changes in regulations of FDI by Companies, Trusts or Partnership Firms Owned & Controlled by Non-Resident Indians (“NRIs”), Establishment or transfer of Indian companies from resident Indian citizens to non-resident entities, Levels of Approvals for Cases under Government Route, FDI in Construction Sector, Defence Sector, Agriculture and animal husbandry, Plantation Sector, Broadcasting Sector, Civil Aviation, Satellites- establishment and operation, Credit Information Companies (CIC), Duty-free shops, Banking Private Sector and FDI by way of swap of shares.

FDI by Companies, Trusts or Partnership Firms Owned & Controlled by NRIs

1. NRIs have a special dispensation for investment in construction development and civil aviation sectors. Also, investment made by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations is deemed to be domestic investment at par with investment made by residents.
2. Now, this special dispensation for NRIs has now been also extended to companies, trusts and partnership firms, which are incorporated outside India and are owned and controlled by NRIs. Henceforth, such entities owned and controlled by NRIs will be treated at par with NRIs for investment in India.

Establishment or transfer of Indian companies from resident Indian citizens to non-resident entities

1. Before the amendment: Earlier, establishment and transfer of ownership or control of the Indian company in sectors/ activities with caps requires Government approval.
2. After the amendment: Now, this provision has been amended to provide that approval of the Government will be required if the company concerned is operating in sectors/ activities which are under Government approval route rather than capped sectors.

Levels of Approvals for Cases under Government Route

1. Before the amendment:
   • The Minister of Finance who is in-charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs. 2,000 crore.
   • The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 2,000 crore would be placed for consideration of Cabinet Committee on Economic Affairs (CCEA).
2. After the amendment: The above limit of Rs. 2,000 crores has been increased to Rs 5,000 crores. Hence, all the proposals with total foreign equity inflow of and below Rs. 5,000 crores shall be considered by FIPB and any proposals beyond that shall be considered by CCEA.

Construction Sector

1. Conditions for FDI
   • Before amendment: FDI will be subject to the following conditions
     • Minimum floor area of 20,000 sq. meters to be developed in case of construction-development projects.
     • Investee company will be required to bring minimum FDI of US$ 5 million within 6 months of commencement of the project.
   • After amendment: Both the above conditions have been deleted. Hence FDI in construction sector is not subject to the above conditions.
2. Each phase to be considered a separate project

Large projects are usually completed in multiple phases. The FDI policy now considers each such phase as a separate project. This change shall facilitate the investor to exit a portion of investment in the project once the identified phase is developed.

3. Exit of Foreign Investor
   • Before amendment: Exit of foreign investor was allowed only under the following circumstances:
     • On completion of the project or after development of trunk  infrastructure  i.e. roads, water  supply,  street  lighting, drainage and sewerage, or,
     • Repatriation of FDI or transfer of stake by one non-resident investor to another non-resident investor, before the completion of project, subject to government permission.
   • After amendment: The exit of foreign investor will now be allowed under the following circumstances:
     • On completion of the project or after development of trunk  infrastructure  i.e. roads, water  supply,  street  lighting, drainage and sewerage, or,
     • Before the completion of project, under automatic route, provided that a lock-in-period of three years, calculated with  reference  to  each  tranche  of foreign  investment  has  been completed, or,
     • Transfer of stake from one non-resident to another non-resident, without repatriation of investment. Such exit shall neither be subject to any lock-in period nor to any government approval.

4. Real estate business defined to exclude earning of rent/ income on lease of property

It has now been clarified that earning of rent/ income on lease of property, not amounting to transfer, will not be regarded as real estate business that is prohibited from receiving FDI under the FDI Policy.

Defence Sector

1. Requirement of prior approval
   • Before amendment:
     • In 2014, the Government took a major step by enhancing FDI cap from 26% to 49%, under government approval route, subject to ownership and control being vested with Indian residents and existing conditionalities under the FDI Policy being met.
     • Proposals involving FDI beyond 49% were put up for consideration of the Cabinet Committee for Security (“CCS”) on case to case basis, provided access to modern and „state of art‟ technology was likely.
   • After amendment:
     • Investment can now be done upto 49% in defence sector through automatic route.
     • In case the FDI> 49%, the investors would now be required to approach FIPB instead of CCS.
2. Investment by Foreign Portfolio Investors (“FPIs”) and Foreign Venture Capital Investors (“FVCI”)
   • Before amendment: Portfolio investment by FPIs/FIIs/NRIs/QFIs and investments by FVCIs together could not exceed 24% of the total equity of the investee/joint venture company.
   • After amendment: Investment by FPIs /FVCIs to be allowed upto 49%.
3. Change in Foreign Ownership Pattern

In case of infusion of fresh foreign investment within the permitted automatic route level resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, Government approval will be required.

Agriculture and animal husbandry

All the conditions for FDI in companies dealing with development of transgenic seeds/vegetables have been deleted.

Plantation Sector

1. Before the amendment: FDI in tea sector was allowed upto 100% of equity, subject to government approval. Besides tea sector, FDI was not allowed in any other plantation sector/activity.
2. After the amendment:
   • Over and above the tea plantations sector, it has been decided to open up Coffee, Rubber, Cardamom, Palm Oil tree and Olive Oil tree plantation sectors to FDI.
   • FDI in plantation sector (including tea) will be permissible up to 100% under automatic route.

Broadcasting Sector

1. Broadcasting Carriage Services

In broadcasting carriage services outlined in FDI Policy, viz., teleports, Direct-To-Home, Cable Networks, Mobile TV and Headend-In-The-Sky

• Before amendment: FDI up to 74% was permissible. FDI up to 49% was permissible under automatic route and between 49% to 74% under government approval route.
• After amendment: FDI up to 100%.  FDI up to 49% permissible under automatic route and above 49% under government approval route.

2. Broadcasting Content Services
   • In case of terrestrial broadcasting FM (FM radio), up-linking of ‘news and current affairs’ TV channels
     • Before amendment: FDI was allowed upto 26% under government approval route.
     • After amendment: FDI up to 49% under government approval route.
   • In case of Up-linking of Non-‘News & Current Affairs’ TV Channels, Down-linking of TV Channels
     • Before amendment: FDI upto 100% under government Approval Route.
     • After amendment: FDI upto 100% under automatic Route.

Civil Aviation

1. Regional Air Transport Service
   • Before amendment: No FDI allowed.
   • After amendment: FDI up to 49% under automatic route.
2. Non-Scheduled Air Transport Service, and Ground Handling Services
   • Before amendment: FDI upto 74% (100% for NRIs). Automatic upto 49% and government approval route from 49% upto 74%.
   • After amendment: FDI upto 100% under automatic route.

Satellites- establishment and operation

1. Before amendment: FDI upto 74% under government approval route.
2. After amendment: FDI upto 100% under government approval route.

Credit Information Companies (CIC)

1. Before amendment: FDI upto 74% under automatic route.
2. After amendment: FDI upto 100% under automatic route.

Duty-free shops

100% FDI has been made permissible under automatic route in Duty-free Shops located and operated in the Customs bonded areas.

Banking Private Sector

1. Before amendment: FIIs/FPIs/QFIs can invest upto the sectoral limit of 49% of the total paid-up capital by the bank.
2. After amendment: Full fungibility of foreign investment has been introduced. FIIs/FPIs/QFIs, following due procedure, can now invest up to sectoral limit of 74%, provided that there is no change of control and management of the investee company.

FDI by way of swap of shares

1. Before the amendment: Approval of government through Foreign Investment Promotion Board (“FIPB”) was a prerequisite for any investment by way of swap of shares.
2. After the amendment: Government approval will not be required for investment in automatic route sectors by way of swap of shares.