India’s FDI Policy for 2017: Startups and Single Brand Retail among Beneficiaries

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By Dezan Shira & Associates 

India’s federal government released an updated and consolidated policy for foreign investors on August 28, relaxing old barriers and providing more regulatory clarity – with immediate effect.

Startups and single brand retail companies are among key beneficiaries of the changes in this year’s foreign direct investment (FDI) policy.

The new FDI policy also outlines procedures for foreign investors looking at sectors that were previously regulated by the now defunct Foreign Investment Promotion Board (FIPB).

India’s Consolidated FDI Policy for 2017

The document released by the Department of Industrial Policy and Promotion (DIPP) offers investors clarity on entry routes for investments into India, sectors requiring government approval and procedures for the same. The document serves as a guide on the regulations monitoring and permitting foreign investments across respective economic sectors.

Several changes in this year’s policy incorporate the incremental updates announced by the government for respective sectors over the last one year.

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With the consolidated FDI policy in place, the Modi government hopes to showcase an investor-friendly environment and greater ease of doing business in India.

Attracting FDI is especially important for the government right now, given its ambitions on the Make in India front – establishing India a manufacturing hub and expanding its startup sector to promote job creation and economic development.

Major changes in the 2017 FDI policy

  • Inclusion of startups in the government’s foreign investment policy: Indian startups can now raise up to 100 percent funding from foreign venture capital investors (FVCIs). The policy simplifies the definition of ‘venture capital funds’ as funds registered under the Securities and Exchange Board of India or SEBI (Venture Capital Funds) Regulations of 1996.
  • Relaxation of the local sourcing rule in single-brand retail: Mandatory local sourcing norms for foreign firms will not be applicable for up to three years from the commencement of their business in the country. This refers to such entities that have ‘state of art’ and ’cutting edge’ technology, and where local souring is not possible. However, after the exemption period ends, these companies will need to comply with the domestic sourcing norm (30 percent in a year). A clear definition of what these terms mean is still missing.
  • Sales by an e-commerce platform: As it stands, an e-commerce entity can source only up to 25 percent of its sales through one of its group companies. The DIPP has now clarified that ‘sales’ will be calculated based on value (not volume) of items sold on a financial year basis – April to March.
  • 100 percent FDI in food retail: Foreign investment up to 100 percent will be permitted under the government approval route for trading, including through e-commerce in the case of food products manufactured or produced in India.
  • Extension of FDI in the pharmaceutical sector: Up to 74 percent FDI will allowed in India’s pharmaceutical sector through automatic route; beyond that limit, the foreign investment will need to secure government approval.
  • Approving authorities clarified: Investment proposals relating to banking, mining, defense, broadcasting, civil aviation, telecom, and pharmaceuticals will need the approval of the respective federal ministries. The DIPP will be the approving authority for proposals relating to retail – single and multi-brand and food and startups. For investments in financial services not regulated by any financial sector regulator such as the SEBI or Insurance Regulatory and Development Authority (IRDA), or where only part of the financial services activity is regulated, or where there is doubt regarding regulatory oversight – the federal department of economic affairs will be the deciding authority.
  • Investment by non-resident Indians (NRIs): A company, trust, or partnership firm that is incorporated outside India and owned and controlled by NRIs will be permitted to invest in India, subject to certain provisions outlined in the FDI policy.

 

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