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 first part of these series of “Reforms in Foreign Direct Investment Policy” will give you a detailed understanding of the changes in definition for FDI, reforms for FDI in LLPs, Single Brand Retail Trading and foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian company/ies.

Definitions added

1. Internal Accruals: For the purpose of Downstream Investments, the FDI policy states that downstream investments through internal accruals are permissible subject to certain conditions. Now, for the purpose of clarity, “Internal Accruals” have been defined to mean profits transferred to reserve account after payment of taxes.

2. Control: For defining “Control” for LLPs, an addition is made to the definition of “Control”. For the purposes of LLP, ‘control’ will mean right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of the LLP.

3. Owned: For the purpose of adding definition of ownership of LLP, a change has been made in the definition of “Owned”. A  Limited  Liability  Partnership will  be  considered  as  owned  by  resident  Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/or entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian citizens and entities have majority of the profit share.

4. Manufacture: A manufacturer is now permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce without Government approval. The word “Manufacture” has been defined in the press note to mean as a process to change an object into an entirely different one having a different name, character and use or thing with a different chemical composition or integral structure.

FDI in LLPs

1. FDI in LLP under Automatic Route
   • Before the amendment : FDI in LLPs was allowed only through Government Approval Route
   • After the amendment: FDI is permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI linked performance conditions.
2. Downstream Investment
   • Before the amendment:
     • An Indian company, having FDI, was permitted to make downstream investment in an LLP only if both-the company, as well as the LLP- were operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.
     • LLPs with foreign investment were not allowed to make downstream investments.
   • After the amendment: An Indian company as well as an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP in sectors in which 100% FDI is allowed  under the automatic route and there are no FDI-linked performance conditions.
3. Restrictions
   • Before the amendment: There were many restrictions for FDI in LLPs, such as
     • LLPs with FDI was not allowed to operate in agricultural/plantation activity, print media or real estate business,
     • Foreign Capital participation in LLPs would be allowed only by way of cash consideration,
     • Investment in LLPs by Foreign Portfolio Investors (FPIs) and Foreign Venture Capital Investors (FVCIs) was not permitted,
       LLPs were not permitted to avail External Commercial Borrowings (ECBs), etc.
   • After the amendment: All the above restrictions have been done away with. The only condition to be fulfilled while having FDI in LLP is that it should comply with the conditions of LLP Act, 2008.

FDI in Single Brand Product Retail Trading (“SBRT”)

Continuing with the policy to further encourage FDI in SBRT, the Government has proposed following policy relaxations –

1. Retail trading by E-commerce
   • Before the amendment: Retail trading by means of e-commerce was not permissible for companies with FDI engaged in the activity of SRBT
   • After the amendment: Retail trading by means of e-commerce is now permissible.
     
2. Procurement requirement
   • Local sourcing of 30% of value of goods purchased
     • Before the amendment: In respect of proposals involving FDI beyond 51%, sourcing of 30% of the value of goods purchased, has to be done from India.
     • After the amendment: In case of ‘state-of-art’ and ‘cutting edge technology’ segment, the extant condition of mandatory local sourcing of 30% value of goods purchased may be dispensed with by Government.
   • Calculation of Local Sourcing
     • Before the amendment: This procurement requirement was earlier required to be met in the first instance, as an average of 5 years’ total value of the goods purchased, beginning 1st April of the year during which the 1st tranche of FDI is received. Thereafter, it had to be met on an annual basis.
     • After the amendment: This procurement requirement will now have to be met annually from the commencement of the business i.e. opening of the first store.
3. Indian Brands
   • Indian brands should be owned and controlled by resident Indian citizens and/or companies which are owned and controlled by resident Indian citizens.
   • Indian manufacturer would be the investee company, which is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in house, and sources, at most 30% from Indian manufacturers.
   • An Indian manufacturer is permitted to sell its own branded products in any manner i.e. wholesale, retail, including through e-commerce platforms.
   • SRBT in Indian brands would be exempted from the following conditions:
     • Products to be sold under the same brand internationally,
     • Foreign investment is either by brand owner or the first level licensor.

Foreign investment into an Indian company engaged only in the activity of investing in the capital of other Indian company/ies

1. Before the amendment: For infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments (irrespective of whether it is under automatic route or government route), Government/ FIPB approval would be required, regardless of the amount or extent of foreign investment.

2. After the amendment
   • For undertaking activities which are under automatic route and without FDI linked performance conditions, Indian company which does not have any operations and also does not have any downstream investments, will be permitted to have infusion of foreign investment under automatic route.
   • Approval of the Government will be required for companies which are under Government route, for infusion of foreign investment for undertaking activities, regardless of the amount or extent of foreign investment.