In  the  past  few  months,  a  lot  of  changes  have  been  brought  about  in  the  Foreign  Direct Investment (“FDI”) Policy. This article summarizes the recent changes in FDI Policy.

 Mapping of the Sector Specific FDI Policy with the NIC -2008 Code

 With the objective of improving ease of doing business, an exercise has been undertaken to map the activities listed in Annexure 1 to the FDI Master Circular providing sector specific policy for foreign investment, with the National Industrial Classification-2008 (NIC Code). Hence, through Press Note No. 1 (2015 Series) dated 05th January, 2015, all the activities in the annexure have been given the specific NIC Codes.

 Changes in Pharmaceutical Sector

 As per the extant FDI guidelines, 100% FDI is allowed in greenfield  investments under the Automatic route and 100% FDI is allowed in brownfield investments under the Government approval route subject to certain conditions. Through Notification [No. FEMA 334/2015-RB]/ GSR  30(E)  dated  09th  January,  2015,  the  following  amendment  has  been  added  in  FDI guidelines:

•  Now, for  manufacturing  of  medical  devices,  FDI  upto  100%  is  allowed  under  the automatic route.
• Medical device has been defined to mean:
  • Any instrument, apparatus, appliance, implant, material or other article, whether used alone or in combination, including the software intended by its manufacturer to be used specially for human beings or animals for one or more of the specific purposes of :-
    • Diagnosis,  prevention,   monitoring,   treatment   or   alleviation   of   any disease or disorder;
    • diagnosis,  monitoring,  treatment,  alleviation  of,  or  assistance  for,  any injury or handicap;
    • investigation, replacement or modification or support of the anatomy or of a physiological process;
    • supporting or sustaining life;
    • disinfection of medical devices;
    • control of conception;
    • and which does not achieve its primary intended action in or on the human body or animals by any pharmacological or immunological or metabolic means, but which may be assisted in its intended function by such means;
  • an  accessory  to  such  an  instrument,  apparatus,  appliance,  material  or  other article;
  • a  device  which  is  reagent,  reagent  product,  calibrator,  control  material,  kit, instrument, apparatus, equipment or system whether used alone or in combination thereof intended to be used for examination and providing information for medical or diagnostic purposes by means of in vitro examination of specimens derived from the human body or animals.
• The definition of medical device above would be subject to the amendment in Drugs and Cosmetics Act.
• This change has been made effective from 21st January, 2015

Changes in Defence Sector

In the defence industry, as per the current policy FDI upto 26% is permitted under the Government approval route subject to license under the Industries (Development & Regulation) Act, 1951. Also, proposals for FDI beyond 26% would be subject to approval by Cabinet Committee on Security  wherever it is  likely to result  in access  of modern  and state of art technology in the country. The following changes have been introduced through AP (DIR Series 2014-15) Circular No. 46 dated 08th December, 2014 in the FDI policy of Defence sector.

• Department of Industrial Policy and Promotion has provided with a list of defence items finalized by the Department of Defence Production, Ministry of Defence. It has been clarified that the following items will not require license for defence purposes:
  • Those items which do not fall in the list,
  • Dual use items, having military as well as civilian applications, other than those specially mentioned in the list.
• Department  of  Defence  Production,  Ministry  of  Defence,  has  finalised  the  ‘Security Manual for Licensed Defence Industry’.
• FDI upto 49% under government route shall be permitted in defence sector. FDI limit of 49% is composite and includes all kinds of foreign investments, i.e. FDI, FIIs, FPIs, NRIs, FVCI and QFIs.
• For FDI beyond 49% which are likely to result in access to modern and `state-of-art’ technology in the country, approval of the Cabinet Committee on Security (CCS) will be sought by the Ministry of Defence.
• The FDI limit of 49% is subject to the following conditions:
  • Licences will be granted by the DIPP, Ministry of Commerce and Industry, in consultation with Ministry of Defence and Ministry of External Affairs.
  • The applicant company should be an Indian company owned and controlled by resident Indian citizens.
  • The  management  of  the  applicant  company  should  be  in  Indian  hands  with majority  representation  on  the  Board  as  well  as  the  Chief  Executives  of the company/partnership firm should be resident Indians.
  • Chief Security Officer (CSO) of the investee/ Joint Venture Company should be resident Indian citizen.
  • The  Government  reserves  the  right  to  verify  the  antecedents  of  the  foreign collaborators and domestic promoters including their financial standing and credentials in the world market.
  • Investee/Joint Venture Company should be structured to be self-sufficient in areas of product design and development.
  • The investee/Joint Venture Company along with manufacturing facility, should also have maintenance and life cycle support facility of the product being manufactured in India.
  • Import of equipment for pre-production activity including development of prototype by the applicant company would be permitted.
  • Adequate safety and security procedures would need to be put in place by the licensee once the licence is granted and production commences.
  • The standards and testing procedures for equipment to be produced will have to be provided by the licensee to the Government nominated quality assurance agency,   which   would   inspect   the   finished product   and   would   conduct surveillance and audit of the Quality Assurance Procedures of the licensee.
    • Self-certification would be permitted by the Ministry of Defence on case to case basis, which may involve either individual items, or group of items manufactured  by  the  licensee. Such  permission  would  be for  a fixed period and subject to renewals.
• Arms and ammunition produced by the private manufacturers will be primarily sold to the Ministry of Defence.
• These items may also be sold to other Government entities under the control of the Ministry of Home Affairs and State Governments with the prior approval of the Ministry of Defence.
• No such item should be sold within the country to any other person or entity.
• Non-lethal items would be permitted for sale to persons/entities other than the Central or State Governments with the prior approval of the Ministry of Defence.
  • Licensee would need to institute a verifiable system of removal of all goods out of their factories. Violation of these provisions may lead to cancellation of the licence.
  • Applications for FDI up to 49% where inflows are in excess of Rs. 1200 crore will be approved by Cabinet Committee on Economic Affairs (CCEA).
  • Proposals  for  FDI  beyond  49%  with  proposed  inflow  in  excess  of  Rs.  1200 crores, which are to be approved by CCS will not require further approval of the Cabinet Committee on Economic Affairs (CCEA).
• Portfolio investment (RFPI/FII/NRI/QFI) and FVCI investment will not exceed 24% of the total equity of the investee company.
  • Portfolio investment will be under automatic route.
  • The  listed  investee  company  engaged  in  defence  sector,  shall  immediately allocate limits for portfolio investment for RFPI (including QFI and FII), NRI (not exceeding 10%) and FVCI within the default portfolio investment limit of 24% being permitted now.

Changes in Railway Infrastructure Sector

As per the extant FDI Policy, FDI is prohibited n activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems). However through AP (DIR Series 2014-15) Circular No. 46 dated 08th December, 2014, following changes have been introduced in the FDI Policy of Railway Infrastructure:

• DIPP has now permitted 100% FDI in railway Infrastructure sector under automatic route subject to conditions.
• It has been decided to permit FDI in the following activities of the Railway Transport sector: Construction, operation and maintenance of the following:
  • Suburban corridor projects through PPP,
  • High speed train projects,
  • Dedicated freight lines,
  • Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities,
  • Railway Electrification,
  • Signaling systems,
  • Freight terminals,
  • Passenger terminals,
  • Infrastructure  in  industrial  park  pertaining  to  railway  line/sidings  including electrified railway lines and connectivities to main railway line and
  • Mass Rapid Transport Systems.
• FDI beyond 49% of the equity of the investee company in sensitive areas from security point of view will need to be approved by Cabinet Committee on Security (CCS).