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18 Oct 2019

Highlights of the Changes to the Indian FDI Policy

The Ministry of Commerce and Industry has issued Press Note 4 of 2019 dated 18th September 2019[i] (“Press Note 4”) to bring changes to the Foreign Direct Investment (FDI) Policy pertaining to Coal Mining, Manufacturing, Single Brand Retail Trading and Digital Media to attract foreign investment into India, increase productivity and enhance competitiveness. 

Following are the amendments in Foreign Direct Investment in India made by Press Note 4:  

I. Coal Mining:

 To draw independent miners and help raise investment and output, 100% FDI is now allowed under the automatic route for coal mining activities including associated processing infrastructure (coal washery, crushing, coal handling, separation) for sale of coal. Earlier, 100% FDI was permitted only in captive coal mining. This would help attract international players to create an efficient and competitive coal market. 

Further, coal and lignite mining activities for captive consumption and coal mining activities, including associated processing infrastructure, would now be governed by the Coal & Mines (Special Provisions) Act, 2015 and Mines and Minerals (Development and Regulation) Act, 1957 as against the erstwhile Coal Mines (Nationalization) Act, 1973. 

II. Contract Manufacturing:

The move allows 100% FDI in contract manufacturing. Therefore, manufacturing activities may now be undertaken by the investee entity through self-manufacturing or through contract manufacturing under a tenable contract, whether on Principal to Principal or Principal to Agent basis. This provides much-needed clarity for third-party manufacturers and would boost domestic manufacturing. Earlier there was ambiguity on whether contract manufacturing was to be considered as ‘manufacturing’ or a ‘trading activity’ for FDI purposes because companies only sold products after getting it manufactured from someone else. Further, the revised FDI policy now allows contract manufacturers to sell products manufactured in India through wholesale and retail channels, including through e-commerce, without the government’s approval. 

Implication on entities trading in Food Product: Now food products manufactured through contract manufacturing and trading by the same manufacturer will fall under Automatic Route and not under the 100% Approval Route. There was no clarity on the same earlier.  

III. Single Brand Retail Trading (SBRT): 

Key changes pertaining to SBRT entities include:

  • SBRT entities can now set off mandatory sourcing requirements with the sourcing of goods from India for global operations. Earlier it was allowed only for the initial 5 years. This would give an impetus to export and result in increased production as well as enhanced competitiveness.
  • SBRT Entity can now operate through e-Commerce without having a brick and mortar store, provided a brick and mortar store is opened within 2 years from the date of the start of the online trade.  

IV. Digital Media:

Now uploading/streaming of news & current affairs through Digital Media has been restricted to 26 % FDI under the government route. Earlier, FDI capping existed only for print media (26%) and TV Channels (49%). In fact, digital media companies had 100% FDI as per section 5.2 (a) of the DIPP guidelines[ii]

“In sectors/activities not listed below, FDI is permitted up to100% on the automatic route, subject to applicable laws/regulations; security and other conditionalities.” 

Although, in line with the government’s Digital India campaign, the introduced cap creates uncertainty on the status of the already existing digital media entities with investment higher than the said percentage. Further, it is unclear whether the policy would be applicable only to uploading/streaming websites or text-based content websites. Furthermore, clear guidelines need to be issued on applicability on online intermediaries/digital news aggregators, applicability on foreign news websites, separation of digital media business from other businesses, divesting or restructuring, etc. as a result of the change. In fact, Department for Promotion of Industry and Internal Trade (DPIIT) has recently sought the I&B Ministry’s views on these and other issues raised on the 26% FDI in the digital media sector.[iii] 

It is pertinent to note that the above regulations will come into force from the date of publication of FEMA Notification.

 

 References:

[i] https://dipp.gov.in/sites/default/files/pn4_2019.pdf

[ii] https://dipp.gov.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17_1.pdf

[iii] https://economictimes.indiatimes.com/news/economy/policy/dpiit-seeks-ib-ministrys-views-on-issues-raised-on-26-fdi-in-digital-media-sector/articleshow/71580402.cms


Image Credits:

Dominik Vanyi

https://unsplash.com/photos/Mk2ls9UBO2E

 

 

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