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17 Nov 2015

Liberalization of FDI regime: Booster Dose 1

The recent changes in the foreign Direct Investment (FDI) Regime, termed as a “Diwali gift” by the media, are definitely innovative and can go a  long way towards addressing some major and widely-debated structural gaps and thus in increasing India’s overall attractiveness as a major FDI destination.

The Press Note issued on Nov. 10, 2015 lists 15 major sectors of the economy where FDI related reforms and liberalization have taken place. Particularly important changes have been announced in the Construction Development, Defence, Single Brand Retail Trading (SBRT) and E-Commerce sectors. Key changes have also been made to Limited Liability Partnerships and transfer of control and ownership of Indian Companies.

This article is primarily aimed at analyzing the changes to the FDI regime applicable to Single Brand Retail Trading and E-Commerce as well as Manufacturers of products who are now allowed to retail their products via online channels.

  1. Manufacturers can undertake wholesale/retail trade including e-commerce without Govt. approval

Even in the earlier FDI regime, manufacturing as a sector was open to 100% FDI without any Government approval. However, it was unclear whether Manufacturers were entitled to sell their products through wholesale or retail trade and if they could undertake e-commerce to sell their products/goods.

In the absence of clarity on this aspect, manufacturers, in general, designed their sales/distribution model on wholesale/cash & carry basis and used the distributorship model (exclusive or otherwise) to exploit the e-commerce route.

The Press Note explicitly clarifies that manufacturers will be permitted to sell their products through wholesale/retail including through e-commerce without Government approval.

It further liberalizes the FDI regime for Indian Manufacturers that have their own brands. The new regime permits Indian Manufacturers to sell their branded products through wholesale/retail trade channels (including e-commerce platforms), provided that the Indian brands are owned and controlled by Indian Residents or Indian Companies. The new regime also permits Indian Manufacturers to source a maximum of 30% of its products from other Indian Manufacturers.

These changes are welcome since they provide an objective yardstick for qualified manufacturers to access both offline and online sales channels. The ability to source some part of their merchandise would also come handy in diversifying their offerings.

 Single Brand Retail Trading to be permitted to take e-commerce:

 The extant FDI Policy prohibited E-Commerce in any form by both companies in Wholesale/Cash & Carry Trading as well as Single Brand Retail Trading (SBRT). The recently-announced liberalization relaxes this restriction and permits companies in SBRT to undertake e-commerce activities.

 There is no change in the percentage of foreign shareholding limits for undertaking SBRT. Thus, any SBRT in which foreign shareholding is more than 49% requires necessary Government approvals. However, once approval is granted, such companies in SBRT can engage in e-commerce also. The same is also applicable for Indian brands which are now eligible for being categorized as “SBRT”.

 While the Press Note has clarified several things, it remains unclear whether SBRT entities where foreign shareholding FDI is below 49% (the Govt. approval threshold) also have the liberty to undertake e-commerce activities. From the language of the Press Release, it appears that such a window has been extended only to those SBRT’s where permission has been granted by Govt. to the SBRT. As such, the fine print of the notification issued by Reserve Bank of India (RBI) in this regard will need to be reviewed before arriving at any conclusion. 

 100% FDI permitted in Duty Free Shops

 The liberalized norms provide for 100% FDI via the automatic route in Duty Free Shops located and operated in Customs bonded areas like duty free shops at international airports in India.

 Same entity can carry out both Wholesale and Single Brand Retail Trading (SBRT):

 The existing restrictions on Wholesale/cash and carry traders to not open retail outlets have been done away with. Now, a single entity can undertake activities both as a Wholesale/Cash and Carry and an SBRT, provided FDI norms for both the business arms are separately complied with.

 This means any entity (with more than 49% FDI) which has received Govt. approval for undertaking SBRT may, without any further Government approvals or change in structure ,also undertake Wholesale / Cash and Carry activities. The Single Brand Retail Trading (SBRT) arm can also engage in e-commerce without affecting the wholesale/Cash and Carry arm of the same entity.

 Investment by Companies/Trusts/Partnerships owned and controlled by NRI’s (non-repatriation basis) to be treated as Domestic Investment

 The new regime permits entities other than incorporated companies like Trusts and Partnerships through which NRIs can invest in Indian entities. This will enhance NRIs interest- and willingness- to create suitable structures for making investments in India. The only caveat is that the entity should be owned and controlled by NRIs and the investment made is on a non-repatriation basis.

 Such investments in “non-repatriation mode” are treated equivalent to domestic investments and as such, afford a good avenue for Indian E-Commerce companies to source funds from NRI diaspora.

 It is worth pointing out that Chinese diaspora played a vital role in capitalizing the Chinese economy over the past two decades. Thus far, NRIs have evinced only tepid interest in being anything other than portfolio investors in India. It is reasonable to believe that measures such as what the government recently announced will boost India’s attractiveness for FDI- especially among NRIs. In turn, we can expect a cascading effect that will boost initiatives such as “Startup India”, “Make in India” and perhaps even “Smart Cities”.

 Watch this space for the sequel that will summarize the other significant changes communicated by the Press Release.

 

Disclaimer:

 This write-up is meant for general informational purposes only. The views expressed are the author’s personal views and as such, they should not be considered as the firm’s view on the subject.

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