FDI policy: What is needed to draw more investment?

By Deepak THM and Vivek Pareek, Luthra & Luthra Law Offices

Start-up India, Make in India and other ambitious government initiatives, coupled with a liberalized policy and legislative improvements in areas such as insolvency and taxation, have resulted in India rising to 100th on the World Bank’s ease of doing business index from its previous rank of 130. The consolidated foreign direct investment (FDI) policy, 2017, released on 28 August, reflects the government’s efforts to accelerate economic growth and create an investor-friendly environment.

Deepak THMPartnerLuthra & Luthra Law Offices
Deepak THM
Luthra & Luthra Law Offices

The revised policy, in addition to consolidating changes made since last year’s policy (phase-out of the Foreign Investment Promotion Board, easing of FDI in startups, liberalization of sectors such as defence, aviation, pharmaceutical, financial services, etc.) announced fresh reforms in certain areas.

The FDI policy has long permitted a manufacturing entity to receive 100% FDI under the automatic route and allowed such an entity to undertake wholesale and retail trade (including e-commerce). However, in 2016 the government introduced a policy amendment stating that an Indian manufacturer would be required to manufacture at least 70% of its products in-house and source at most 30% from other Indian manufacturers, failing which the manufacturer would have to adhere to single-brand retail trading conditions including local sourcing norms. To the relief of the Indian manufacturing sector, the 70:30 norm has been removed in the revised policy.

Last year the Department of Industrial Policy and Promotion (DIPP) relaxed local sourcing norms by making them applicable only after three years from commencement of business for products with “state-of-art” and “cutting edge” technology. However, these terms were not defined nor was there any guidance on interpreting them. The revised policy has now provided for a committee, headed by the DIPP secretary and including independent technical experts, to examine and provide recommendations on applications claiming this relaxation. Though a welcome change for international retailers who’ve been eyeing India, the committee should quickly introduce specific guidelines and parameters to determine the scope of “state-of-art” and “cutting edge” technology, so prospective applicants can assess their eligibility before making an application to the committee.

Vivek PareekManaging associateLuthra & Luthra Law Offices
Vivek Pareek
Managing associate
Luthra & Luthra Law Offices

While the government has made praiseworthy and encouraging efforts, the introduction of a US$765 million cap for additional FDI in an entity within an approved foreign equity percentage or in a wholly owned subsidiary, beyond which a subsequent approval would be required, came as a surprise.

Further some of the policy ambiguities and regulatory impediments which should have been allayed in the revised policy continue to exist. The following are some reforms that the government should consider:

  • The policy is still silent on the meaning of “modern technology” regarding FDI in defence. The policy should define the term or establish a committee system similar to the one for providing recommendations on applications claiming “state of art” and “cutting edge” technology in relation to single-brand retail trading.
  • The requirement for holding companies to obtain approval, where the underlying foreign investments are in a sector under the automatic route, should be removed.
  • To provide further impetus to Make in India and enable measured liberalization in multi-brand retail, the government should permit FDI in multi-brand retail of certain classes of products (e.g. electronics and apparel) which are manufactured in India.
  • A relaxed FDI regime for insurance intermediaries (such as insurance brokers, third party administrators, surveyors, loss assessors, etc.) as compared to insurance companies would be a welcome change. The current sectoral cap of 49% with sector-specific conditions for insurance intermediaries is perceived as excess regulation particularly as the regulations of the Insurance Regulatory and Development Authority of India are far more liberal.
  • Up to 100% FDI under the automatic route should be allowed for brownfield pharma, with sector-specific policies to address any concerns.
  • The government should consider further liberalization in the FM radio and the print media sectors.

While the government’s policy trends are laudable and are making the regulatory climate in India more mature and stable, it is imperative that the government continues to bolster FDI reforms to foster increased investment and to project India as an attractive investment destination.

Deepak THM is a partner and Vivek Pareek is a managing associate at Luthra & Luthra Law Offices. The views expressed here are personal. They are intended for general information purposes and are not a substitute for legal advice.

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