On 1 August 2013, the Indian central government’s cabinet committee on economic affairs formally ratified the decision taken by the prime minister, on 16 July, to introduce the latest set of foreign direct investment (FDI) reforms in India.
These measures impact a number of sectors in which the sectoral cap for foreign investment and the approval mechanism have been liberalised. Some of the important changes in FDI limits announced are summarised in the graphic below.
Definition of control
The cabinet also approved a proposal for modifying the definition of control under the FDI policy. Earlier, the FDI policy provided that an Indian company would be considered as “controlled” by resident Indian citizens if resident Indian citizens, and Indian companies, which are owned and controlled by resident Indian citizens, had the power to appoint a majority of the directors in that company.
The revised definition of control includes the right to appoint a majority of directors or to control the management or policy decisions, including by virtue of their shareholding or management rights, or shareholders agreements, or voting agreements.
This new definition is more consistent with the definition of control under the Indian Takeover Code and the Companies Bill 2012, which received presidential assent on 29 August 2013. The new definition will have far-reaching impact on foreign investments in key sectors such as aviation, defence and media.
FDI in retail sector
In 2012, the Indian government allowed foreign investment in the retail sector. However, due to certain requirements on local investments and sourcing, the announcement had not resulted in the desired level of foreign investment. The government has now announced certain relaxation in these restrictions. These are:
- The cabinet has clarified that only 50% of the first instalment of US$100 million investment must be invested in back-end infrastructure within three years. Earlier this requirement applied for the entire investment made by the foreign investor;
- The investment limit in plant and machinery by Indian micro, small and medium-sized enterprises has been increased to US$2 million from US$1 million. It has also been clarified that this will be tested only at the time of first engagement with the supplier;
- Sourcing from agricultural co-operatives and farmer’s co-operatives will also be counted for the mandatory local sourcing rule;
- The state governments have been given flexibility to identify even smaller cities for allowing setting up of supermarkets. The rule of permitting supermarkets only in cities with a minimum population of one million has been abolished.
This latest set of reforms is a continuation of the liberalisation process that started in 1991, and has since progressed in gradual phases. The Indian government hopes that these liberalised norms will attract more foreign investment in the desired sectors.
From a Chinese perspective, these reforms are once again a signal that India is ready to receive increased investment flows from Chinese companies that were not welcome in key sectors such as power, telecoms, etc., several years ago.
Earlier this year, the Indian ambassador to China had specifically highlighted the need for Chinese investments in India. This was followed by the hugely successful visit of Chinese Premier Li Keqiang to India, which was his first overseas visit after coming to power.
Today, many Chinese state-owned enterprises and listed companies have already announced their intent to invest in India. Other smaller companies are also covering a lot of ground and preparing to enter the Indian market. India’s general election, scheduled for next year, will bring more certainty to the investment environment and help cement this trend.
Santosh Pai and Vikas Kumar are partners at D H Law Associates. D H Law Associates is the only full-service Indian law firm with an active China practice since 2010
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