SKP Business Alert
 6 September 2017
Indian government issues Consolidated FDI Policy 2017
 
The Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce and Industry, has released the Consolidated Foreign Direct Investment Policy (FDI Policy) for the year 2017-18. The Policy incorporates the changes made over the past year and will be effective from 28 August 2017 according to a press release by the Ministry.
 
The DIPP deals with matters relating to FDI in India and issues the FDI Policy which is a compilation of various policy-related decisions taken by the government since the release of the previous policy on 7 June 2016, thus providing a consolidated policy for readers.
 
During the last year, the government introduced various changes in foreign investment related issues and liberalised investment in several sectors. The key changes in the FDI Policy are: 
  • Abolition of the FIPB
    In line with the previous budget announcement, the Foreign Investment Promotion Board (FIPB), which was responsible for processing FDI proposals and sanctioning approvals, has been abolished by the government. In place of the FIPB, the new administrative ministry/department would process proposals which fall under the approval route. Furthermore, the work of granting government approvals for foreign investments under the existing FDI Policy and Foreign Exchange Management Act (FEMA) regulations shall be entrusted to the concerned administrative ministries/departments (Competent Authorities). The Competent Authorities will examine proposals as per the Standard Operating Procedure laid down by the DIPP.
  • FDI in start-ups
    The FDI Policy, for the first time, lists start-ups as a separate section and permits 100% investment in start-ups. It allows start-ups to issue equity or equity-linked instruments or debt instruments to foreign venture capital investors. Additionally, it also allows start-ups to issue convertible notes to a person who is a resident outside India, subject to certain terms and conditions.
  • Liberalised FDI in certain sectors
    The government, over the past year, has liberalised foreign investment in various sectors. The sectoral changes under the FDI Policy are listed below:
     
Sector Changes introduced
Agriculture & Animal Husbandry
  • Apiculture has been included under the 100% automatic route.
  • Controlled conditions for animal husbandry, pisciculture, aquaculture and apiculture seem relaxed by the omission of conditions from the FDI Policy.
Manufacturing Sector
  • Now, 100% FDI under the government approval route is allowed for retail trading, including e-commerce, for food products manufactured or produced in India.
Defence Industry
  • 100% FDI is permitted in the defence sector against 49% as permitted earlier.
  • Investment up to 49% is permitted under the automatic route. Any investment beyond that would fall under the government route ‘wherever it is likely to result in access to modern technology or for other reasons to be recorded as against ‘wherever it is likely to result in access to modern and state-of-art technology in the country’.
Broadcasting Carriage Services
  • Presently, 100% investment is allowed under the automatic route.
  • An additional condition has been prescribed under the Consolidated FDI Policy, 2017 that states that an infusion of fresh foreign investment beyond 49% in a company not seeking license/permission from the sectoral ministry, that results in a change in the ownership pattern or transfer of stake by an existing investor to new foreign investor(s), will require approval from the government.
Airports - Existing Projects
  • Presently, 100% FDI is allowed in existing airport projects under the automatic route as compared to 74% under the previous sectoral cap.
Transport Services
  1. Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline
  2. Regional Air Transport Service
  • Presently, 100% FDI is allowed as against the prior 49%. Under the automatic entry route, FDI is permitted up to 49% (100% for NRIs) and under the government route, beyond 49% is permitted.
Private Agency Securities
  • 49% is allowed through automatic route, which was earlier under the government approval route. Beyond 49% and up to 74% is allowed via the government approval route.
Single Brand Product Retail Trading
  • Sourcing norms are relaxed since it will not be applicable for up to three years from the commencement of the business (i.e. opening of the first store for entities undertaking single brand retail trading of products having ‘state-of-the-art’ and ‘cutting-edge’ technology and where local sourcing is not possible). Thereafter, provisions of sourcing norms will be applicable.
Pharmaceuticals - Brown Field
  • Up to 74% FDI is allowed under the automatic route in brown field projects and any amount beyond that shall fall under the government approval route. Earlier, 100% investment was allowed under the approval route.
  • Furthermore, such investment is subject to additional conditions given in the FDI Policy. 
Other Financial Services
  • The investment cap of 100% and entry under automatic route remains the same.
  • This sector was earlier called ‘Non-Banking Finance Companies’. Besides this, the change in sector name has widened its scope by providing financial service activities regulated by financial sector regulators, viz. Reserve Bank of India (RBI), Securities Exchange Bureau of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA), National Housing Bank (NHB) or any other financial sector regulator as may be notified by the Government of India.
  • Minimum capitalisation norms under the FDI Policy have been removed but subject to certain conditions including minimum capitalisation norms, etc. would be applicable as specified by the concerned regulator/government agency.
  • It is also provided that other financial services activities need to be regulated by one of the financial sector regulators.
  • FDI in all such financial service activities which are not or partially regulated by any financial sector regulator shall be allowed via the government approval route.
Infrastructure Company in Securities Market
  • There has been a change in the conditions of investment in this sector which states that the conditions of FDI shall be as per SEBI laws.
SKP's Comments
The FIPB was abolished to simplify the procedures for clearance on FDI proposals under the government approval route. The intent of this is to further facilitate ease of doing business. The fact that the government has laid down standard operating procedure as to how the proposals would be processed by the competent authority is also a welcome move. It will be interesting to see how quickly the competent authority will get accustomed to this procedural change.

The inclusion of start-ups in FDI Policy, allowing 100% investment by foreign venture capital investors, is a proactive step which would help start-ups access the much-needed capital they require. Liberalisation in several sectors would augur foreign capital investment in India and facilitate growth.
SKP
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