Big FDI Reforms in India – Single Brand Retail, Contract Manufacturers, Coal Mining to Benefit

Earlier this week, the government of India announced a slew of changes to its existing foreign direct investment (FDI) norms. These include new norms for single-brand retail, coal mining, contract manufacturing, and digital media.

The FDI reforms are a part of the government’s larger scheme to remove market access barriers for foreign firms, encourage investments, and get India’s economic growth back on track. In the last five years, the government has undertaken more than 30 such sector reforms.

Below, we provide a roundup of all the changes introduced under the new FDI policy:

Single-brand retail

The government amended existing FDI policy to allow single brand retailers to sell online without establishing a physical store in India. This opens up India’s retail market for everyone to test the market dynamics without making large-scale investments.

Until now, every brand had to have a physical presence in India to open an online store.

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Moreover, to have a physical presence, it was mandatory for brands to procure 30 percent of the value of goods sold in India, locally.

Now, a single brand retail entity with more than 51 percent FDI can count all its procurements made from India as local sourcing, irrespective of whether the goods procured are sold in India or exported.

In addition, new rules provide for global retailers to do sourcing through an unrelated third party under a legally-tenable agreement. Earlier, companies were allowed to source goods locally only directly by the brand or its group companies.

The liberalization follows criticism from  global retailers, such as Walmart and Amazon, that have been disappointed with the government’s strict norms around FDI for e-commerce and retail.

Last year, the government announced that e-commerce platforms with foreign investment would not be able to sell products of companies in which they have any ownership or equity interest. It also banned these companies from selling more than 25 percent of their sales via any single e-commerce marketplace. These provisions are in effect since February 2019.

Contract manufacturing

In a big push to the government’s Make in India initiative, the recent reforms have introduced 100 percent FDI in contract manufacturing through the automatic route (which means that government approval is not required).

With an escalating trade war between the US and China, the opening up of contract manufacturing brings about certainty for companies looking to set up an alternate manufacturing hub in the country.

Several global brands looking to expand their presence in India market, such as Apple, Swarowski, and Ikea, as well as pharmaceutical firms that depend on contract manufacturers for drug production, will benefit from the new rule.

Contract manufacturing helps save costs for companies that do not want to establish internal production facilities, and also provides companies more flexibility when the demand for a specific good is high and increases productivity.

Previously, India did not have any specific provision for contract manufacturing in its FDI policy.

Coal mining

The policy amendment removes FDI restrictions for coal mining and infrastructure projects, allowing 100 percent FDI under the automatic investment route.

Previously, FDI was allowed only in captive coal and lignite mining by power projects, steel and cement companies, and the sector was the exclusive domain of the government.

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Though 100 percent FDI in coal mining is a progressive step, experts note that there is much more that needs to be done to attract global investments in coal mining.

Despite the opening up of the sector, the investors will still have to go through auction to procure coal mine, as well as the regulatory hurdles to acquire the land for operations. 

Digital media

While most sectors have received relaxations under the FDI reforms, FDI in digital media is capped at 26 percent under government approval for uploading, or streaming of news and current affairs through digital media.

According to industry experts, there was no explicit policy on digital media previously. The policy earlier allowed 49 percent FDI under approval route in up-linking of news and current affairs TV channels.

The government is yet to issue clarifications and details on the applicability of FDI policy on digital media.             

Consult experts before investing

Liberalization of FDI norms and a deliberate government strategy to promote single-brand retail, coal mining, and digital media spells opportunity for foreign firms.

However, to tap these opportunities, companies must seek expert advice to acquire a thorough understanding of India’s regulatory framework, tax system, and corporate establishment process before bidding on projects or setting up operations in India.

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