India’s FDI Policy Amended: Single Brand Retail, Medical Devices Win Big

The federal government approved major amendments to India’s FDI Policy on January 10 to ease doing business and remove unintended obstacles for investments in certain industries.

Major beneficiaries include single brand retailers and the medical devices industry, with the government providing more clarity on compliance requirements and easing the investment process.

In addition, local audit firms received a leg up from the updated Policy, which stipulates new conditions on the appointment of auditors by Indian companies receiving foreign investment.

Foreign investors that have been monitoring FDI reforms since 2014 will note that the latest initiative fits with what now appears to the government’s standard process for opening up key sectors to FDI.

Below we outline the amendments to the existing FDI Policy, highlighting significant changes for single brand retail, medical devices, civil aviation, construction, power exchange, and approval requirements.

Single brand retail

Foreign firms can now fully own local single brand retail chains. Previously, foreign firms needed approval from the department of industrial policy and promotion (DIPP) to invest above 49 percent.

Equally important, the local sourcing rule has been somewhat relaxed for foreign single brand retailers. Foreign retailers are no longer subjected to the 30 percent target for local sourcing for a five year period, if they are able to offset the 30 percent local sourcing compliance against purchases made globally. The relaxation is, therefore, incremental and a compromise.

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Foreign players interested in entering the Indian market will need to strategize their sourcing and retail business accordingly. Beneficiaries include Swedish furniture retailer IKEA and Swedish fashion house H& M Hennes and Mauritz AB.

IKEA has ambitious plans for selling in the Indian market and H&M has been aggressively expanding its retail outlets across the country. Multinational foreign retail chains that delayed India plans due to local sourcing rules could now reconsider entering the market.

Medical device industry

The updated FDI Policy brings more clarity into the rules for investing in India’s medical devices industry.

The government has removed a clause from the existing Policy, which determined ‘medical devices’ as per the Drugs and Cosmetics Act of 1940.

This greatly restricted the scope of investments in several technologies, products, and services that come under the broad definition of medical devices.

Since the FDI Policy is now delinked from the 1940 Act, a much wider range of medical devices will benefit from up to 100 percent FDI via the automatic route. Further, the expanded list as mentioned in the Policy will be treated as complete, and not subject to any other law.

The updated list of medical devices can be found here.

Audit firms

In its amendments to the FDI Policy, the federal government stipulated “joint audits” for an Indian company receiving investments from a foreign investor that uses an auditor firm that is part of an international network, such as KPMG, PwC, Deloitte, and Ernst & Young.

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While “joint audits” may favor domestic audit firms, the condition only states that the two audit firms must not belong to the same network. This can technically allow the investee company to employ two different international auditor firms, and not necessarily favor local firms.

Civil aviation

Subject to government approval, foreign airline companies will now be able to invest up to 49 percent in the capital holdings of Indian companies in Air India.

However, the following two conditions will need to be satisfied:

• Total foreign investment in Air India, including that of foreign airline firms, cannot exceed 49 percent either directly or indirectly; and,
• The substantial ownership and effective control of Air India must remain with an Indian national.

Construction development

The government has clarified that real estate broking services are not considered to come under real estate business. Consequently, they are eligible for up to 100 percent FDI under the automatic route.

Power exchanges

Foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) can now invest in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010 through the primary market. Previously, the government allowed such investments only via the secondary market, where securities are traded after the company has sold all the stocks and bonds offered on the primary market.

FDI permitted in power exchanges remains 49 percent via the automatic route.

Approval requirements under the FDI Policy

Investments via the automatic route involving “countries of concern” will now be referred to the DIPP. Previously these investments needed security clearance from the Ministry of Home Affairs (MHA).

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In the case of investments from “countries of concern” requiring government approval – these will continue to be processed by respect administrative ministries and government departments.

The issuance of equity shares will be permitted against non-cash considerations, such as pre-incorporation expenses and the import of machinery, for sectors eligible to receive investments under the automatic route. Previously, this was allowed only for investments under the government approval route.

Currently, foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian companies or LLP’s, and in the Core Investing Companies, is allowed up to 100 percent with prior government approval. However, it has now been decided to align FDI policy on these sectors with FDI policy provisions on “other financial services”.

If the above activities are regulated by any financial sector regulator, then foreign investment up to 100 percent under the automatic route will be allowed.

If they are not regulated by any financial sector regulator, or are only partly regulated, or where there is doubt regarding regulatory oversight, foreign investment up to 100 percent will be allowed under the government approval route – this will be subject to conditions, including a minimum capitalization requirement, as decided by the government.

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