Changes in FDI Policy
The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India recently released the new consolidated foreign direct investment (FDI) policy (New FDI Policy). The New FDI Policy has been made effective immediately from the date of its publication, i.e., 7 June 2016. The New FDI Policy supersedes the consolidated FDI policy of 2015 (Erstwhile FDI Policy) issued by the DIPP on 12 May 2015 and consolidates press notes issued by the DIPP up to 6 June 2016.
The annual exercise of releasing the consolidated FDI policy is primarily intended towards (i) consolidating various press releases / press notes issued by the DIPP and amendments to regulations as notified by the Reserve Bank of India (RBI) in the intervening period between 2 consolidated FDI policies; and (ii) providing clarifications to align the latest FDI policy with existing laws and regulations.
It is pertinent to highlight that the RBI recently inserted Regulation 10A in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FEMA 20) to allow (i) a non-resident investor to pay up to 25% (Twenty five per cent) of the total consideration on a deferred basis for a period of up to 18 (eighteen) months; and (ii) creation of escrow mechanism for the same without seeking the RBI’s prior approval. This amendment provides flexibility to the non-resident investors to structure their transaction by allowing (i) creation of an escrow mechanism for securing indemnity rights and having an effective remedy against sellers for breach of warranties; and (ii) price adjustment mechanism post-closing of transactions. The New FDI Policy, however, does not reflect the updated position regarding payment of consideration on a deferred basis which may create some ambiguity. However, we are of the view that the New FDI Policy should be read in conjunction with the above mentioned amendment and the updated position regarding payment of consideration on a deferred basis should prevail over the New FDI Policy.
Key changes in the New FDI Policy
- Private Security Agencies: The New FDI Policy has clarified that the terms “private security agencies”, “private security”, and “armoured car service” shall have the same meaning as provided to such terms under the Private Security Agencies (Regulation) Act, 2005 (PSAR Act). Accordingly, private security agencies would include any person (other than any governmental agency) providing private security services including training of private security guards and deployment of armoured cars.
- Investment by Foreign Venture Capital Investors (FVCIs): The New FDI Policy permits FVCIs to invest in the infrastructure sector and in ‘startups’ engaged in any sector. FVCIs were only permitted to invest in Venture Capital Funds (VCF) or an Indian Venture Capital Undertaking (IVCU) until now. FVCIs are now permitted to invest in (i) Indian companies engaged in any of the 10 (Ten) sectors listed in Schedule 6 of FEMA 20, including the newly added infrastructure sector; (ii) startups irrespective of the sector in which the startup is engaged; (iii) units of a VCF or of a Category I Alternate Investment Fund (Cat I AIF) or units of a scheme or a fund set up by a VCF or by a Cat I AIF.
- FDI in Courier Services: FDI in courier services was allowed up to 100% (One hundred per cent) through the approval route until 2014. Thereafter, this sector was liberalised and investment up to 100% (One hundred per cent) was allowed under the automatic route. The New FDI Policy has removed courier services from the list of sectors/activities for which conditions have been prescribed.
Key Changes by way of Press Notes / Amendments to other Regulations consolidated in the New FDI Policy
- ESOPs: The RBI notified amendments to provisions governing issuance of shares under Employees’ Stock Option schemes (ESOP) and sweat equity shares vide the FEMA 20 (Fourth Amendment) Regulations, 2015 dated 11 June 2015. The key changes are set out below:
- Definitions of ESOP and sweat equity shares were introduced;
- Companies were permitted to issue ESOPs / sweat equity shares to non-resident employees/directors of their holding company;
- The requirement of face value of the shares being issued not exceeding 5% (Five per cent) of the paid up capital of the company was done away with;
- The amended provisions are silent on the mode of issue of ESOPs / sweat equity shares i.e. directly or through a trust; and
- Plain paper reporting of grant of ESOPs was replaced by reporting under the “Form ESOP”, thus introducing a common form for all reporting requirements in connection with grant of ESOPs or issue of sweat equity shares or issue of shares pursuant to exercise of ESOPs.
- Investment by Non-Resident Indians (NRIs): As per Press Note No 7 (2015 Series), NRI investments made on non-repatriation basis are now deemed to be domestic investments. Further, the definition of NRI was also amended to include Overseas Citizens of India and Persons of Indian Origin (PIO).
- Introduction of Composite Caps: The DIPP had introduced composite caps for bringing uniformity and simplicity across the sectors in Erstwhile FDI Policy vide Press Note No 8 (2015 Series). Accordingly, the cap on foreign investment now takes into account all types of foreign investment such as FDI, FPI, FII, NRI, FVCI, QFI etc. Further, an individual FII/FPI/QFI can invest up to 10% (Ten per cent) of the share capital of a company and the aggregate investment limit for FII/FPI/QFI investment is capped at 24% (Twenty four per cent) of the share capital of a company. The composite caps are not applicable to defence and banking sector to avoid ‘flyby-night-operators’ and quick money coming in and going out in these sensitive sectors.
- Foreign investment into Investment Vehicles (AIFs, REITs, INVITs etc.): The RBI amended FEMA 20 to allow foreign investments in Investment Vehicles from any person outside India (including FPIs and NRIs) subject to the conditions mentioned therein without seeking any specific approval from the RBI or the Foreign Investment Promotion Board (FIPB).
- Liberalisation in Insurance and Pension sector: The Government liberalised its Erstwhile FDI Policy on foreign investment in the insurance and pension sectors vide Press Note No 1 and 2 (2016 Series) by allowing foreign investment up to 49% (Forty nine per cent) under the automatic route subject to the conditions prescribed therein.
- Defence: FDI up to 49% (Forty nine per cent) was permitted under the automatic route and FDI in excess of 49% (Forty nine per cent) would require approval of the FIPB or the CCEA (as the case may be based on the revised threshold set out in paragraph 6(a) above) instead of the Cabinet Committee on Security. Further, several FDI-linked performance conditions such as management being in Indian hands, majority representation on the board of the directors of the company being resident Indians, the Chief Executive Officer and Chief Security Officer being resident Indian citizens, etc. were done away with.