Cabinet paves way for further liberalisation of FDI policy

New Delhi : The Union Cabinet chaired by Prime Minister Narendra Modi on Wednesday approved a number of amendments in the Foreign Direct Investment (FDI) Policy, intended to liberalise and simplify the policy so as to provide ease of doing business in the country.

The Cabinet approval will however, attract larger FDI inflow and subsequently greater growth of investment, income and employment.

FDI is a major driver of economic growth and a source of non-debt finance for the economic development of the country. The government has put in place an investor friendly policy on FDI, under which FDI up to 100 percent is permitted on the automatic route in most sectors/ activities.

In the recent past, the Government has brought FDI policy reforms in a number of sectors such as defence, construction development, insurance, pension, other financial services, asset reconstruction companies, broadcasting, civil aviation, pharmaceuticals, trading and others.

Measures undertaken by the Government have resulted in increased FDI inflow in to the country. During the year 2014-15, total FDI inflows received were USD 45.15 billion as against USD 36.05 billion in 2013-14. During 2015-16, country received total FDI of USD 55.46 billion, while the financial year 2016-17 saw total FDI of USD 60.08 billion, which is an all-time high.

As part of the amendments, the Cabinet declined the need for approval for FDI in Single Brand Retail Trading (SBRT). Extant FDI policy on SBRT allows 49 percent FDI under automatic route, and FDI beyond this, up to 100 percent through government approval route.

It has now been decided to permit 100 percent FDI under automatic route for SBRT.

Further, single brand retail trading entity will be permitted to set off its incremental sourcing of goods from India for global operations during initial five years, beginning April 1 of the year of the opening of first store against the mandatory sourcing requirement of 30 percent of purchases from India.

For this purpose, incremental sourcing will mean the increase in terms of value of such global sourcing from India for that single brand (in Indian Rupee) in a particular financial year over the preceding financial year, by the non-resident entities undertaking single brand retail trading entity, either directly or through their group companies.

After completion of this five year period, the SBRT entity shall be required to meet the 30 percent sourcing norms directly towards its India's operation, on an annual basis.

A non-resident entity or entities, whether owner of the brand or otherwise, is permitted to undertake 'single brand' product retail trading in the country for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking single brand retail trading and the brand owner.

The Cabinet decided to clarify that real-estate broking service does not amount to real estate business and is therefore, eligible for 100percent FDI under automatic route.

As per the extant FDI policy, issue of equity shares against non-cash considerations like pre-incorporation expenses, import of machinery is permitted under government approval route. It has now been decided that issue of shares against non-cash considerations like pre-incorporation expenses and import of machinery shall be permitted under automatic route in case of sectors under automatic route.

Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies/ LLP and in the Core Investing Companies is presently allowed upto 100 percent with prior Government approval. It has now been decided to align FDI policy on these sectors with FDI policy provisions on Other Financial Services.

Thus, if the above activities are regulated by any financial sector regulator, then foreign investment up to 100 percent under automatic route shall be allowed; and, if they are not regulated by any Financial Sector Regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100 percent will be allowed under Government approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government.

However, it has now been decided that for investments in automatic route sectors, requiring approval only on the matter of investment being from country of concern, FDI applications would be processed by Department of Industrial Policy and Promotion (DIPP) for Government approval. Cases under the government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by concerned Administrative Department/Ministry.

Meanwhile, FDI policy on the pharmaceuticals sector inter-alia provides that definition of medical device as contained in the FDI Policy would be subject to amendment in the Drugs and Cosmetics Act. As the definition as contained in the policy is complete in itself, it has been decided to drop the reference to Drugs and Cosmetics Act from FDI policy. Further, it has also been decided to amend the definition of 'medical devices' as contained in the FDI Policy.