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Indian Government announces easing of foreign direct investment rules
July 27 2016
The Indian Department of Industrial Policy & Promotion (DIPP) has announced sweeping changes to its foreign direct investment policy with the release of Press Note 5 (2016 series). The new measures bring further liberalisation in nine key sectors, including allowing 100% FDI in defence, civil aviation and food processing. The need for prior Government approval for up to 74% FDI brownfield investment in pharmaceutical companies has also been removed.
The major changes to the FDI policy are summarised below:
Single brand retail trading
100% FDI in ‘single brand’ retail trading is permitted (up to 49% FDI is allowed under the automatic route with Government approval needed beyond that). Where FDI exceeds 51%, there is a local sourcing requirement for 30% of the value of goods purchased, preferably from MSMEs, village and cottage industries, artisans and craftsmen. Under the new announcement, entities undertaking single-brand retail trading involving ‘cutting edge and state-of the-art technology’ can be exempted from the local sourcing requirement for three years, with an option to extend this by another five years.
The Government has already permitted a single brand retail trading entity operating through a bricks and mortar store to undertake retail trading through e-commerce.
Full foreign ownership of arms-making projects will now be allowed but this will be subject to Government approval. In the defence sector, the Government has permitted foreign investment beyond 49% under the Government approval route.
100% FDI had already been allowed in cases where ‘state-of-the-art technology’ was brought into the country. However, the Government has now removed this condition and will consider cases which bring ‘modern technology’ into India.
100% FDI in defence will provide a boost to the sector as a whole, creating a win-win situation for India. Not only will it give access to cutting edge technologies but it will also enhance overall investment in research and development for solutions catering specifically for the country’s security needs.
The Government has raised the FDI limit in scheduled commercial airlines to 100% from 49%. Foreign airlines, however, are barred from holding equity stakes in Indian carriers above 49%. As per the present FDI policy, foreign investment of up to 49% is allowed under the automatic route in scheduled air transport service/domestic scheduled passenger airlines and regional air transport services. It has now been decided to raise this limit to 100%, with FDI of up to 49% permitted under the automatic route and FDI beyond 49% allowed with Government approval.
The Government has also agreed to 100% FDI in airports under the automatic route for greenfield and brownfield projects.
The Government has relaxed its rules to allow 100% FDI in existing pharma companies or brownfield units provided any FDI beyond 74% is subject to Government approval. For all greenfield projects, 100% FDI is allowed under the automatic route. Until now, foreign pharma companies needed approval from the Government to buy into an Indian entity which is a time-consuming process. However, foreign pharma companies or financial investors wishing to invest or acquire Indian pharma companies can now do so by buying an equity stake of up to 74% without any prior clearance.
Private security agencies
The Government has permitted FDI of 49% in private security agencies under the automatic route and investment of up to 74% will be allowed with prior Government approval. Indian private security agencies are governed by the Private Security Agencies Act and an amendment to the Act may be required to increase FDI from 49% to 74%.
Other decisions have included allowing 100% FDI in teleports, direct-to-home, cable networks and mobile TV under the automatic route. The Government has also removed ‘controlled conditions’ for FDI in animal husbandry, pisciculture, aquaculture and apiculture. At present, 100% FDI in these activities is allowed under the automatic route under controlled conditions.
These are the second set of reforms to be introduced since the radical changes announced in November 2015 to promote the Make in India agenda of the Government and are expected to provide a major uplift to employment and job creation in India. Investment in most sectors is now permitted under the automatic approval route, with just a few exceptions.
19 Nov 2018
According to the Work Bank’s “Doing Business 2019” report, India has climbed 23 spots from a year ago. As a result, it now ranks 77 out of 190 countries on the ease of doing business index. It’s clear that the current government’s reforms have made it easier for companies to run a business in India.
The following are key indicators of the “Doing Business 2019 Report”;
Starting a business Procedures
India made starting a business easier by fully integrating multiple application forms into a general incorporation form.
The Ministry of Corporate Affairs (MCA) launched the Simplified Proforma for Incorporating Company Electronically (SPICe) e-Form. The SPICe is a versatile form that leverages digital technology. It does so by eliminating the need for hard copies of physically signed documents being attached to an e-form. SPICe is now the Sole, Simplified & Versatile form available for incorporation of a company in India.
The MCA has also integrated the MCA21 System with the CBDT for the issue of PAN and First TAN to a company incorporated using the SPICe. On approval of SPICe forms, the user receives an electronic e-mail with a Certificate of Incorporation attached along with PAN and TAN.
Dealing with Construction permits Procedures
India streamlined the process of obtaining a building permit. It also made it faster and less expensive to obtain a construction permit.
For example; the procedure or steps involved in obtaining a construction permit in Delhi has been reduced to 8 from earlier 29. The time frame has been reduced to 60 days from 213 days in 2016.
Getting electricity Procedures
The Delhi Electricity Regulatory Commission reduced charges for low voltage connections. Also, a reduction in the time for the utility to carry out the external connection works made obtaining electricity in Delhi easier.
The Insolvency and Bankruptcy Code, 2016 enacted as a law on 28th May 2016 after extensive consultations with stakeholders.
The Code provides for a new legal framework for dealing with insolvency matters.
All the elements of the corporate insolvency eco-system, namely; the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT), the Insolvency Professionals (IP), the Insolvency Professional Agency (IPA), the Insolvency Professional Entity (IPE), and the Insolvency and Bankruptcy Board of India have been made operational.
The new insolvency and bankruptcy code introduced a reorganization procedure for corporate debtors and facilitated the continuation of the debtor’s business during insolvency proceedings.
The recent amendment to the Indian Bankruptcy Code has significantly improved investor’s confidence. The Code now gives secured creditors absolute priority over other claims within insolvency proceedings, by preventing wilful defaulters from buying up any of their own troubled assets at discounted rates.
Protecting minority investors
Limits for certain related party transactions revised.
The existing limit of obtaining shareholder approval if the value of property exceeds 10% or INR 1 billion (Whichever is less), has been amended and now, shareholder would have to approve if the value of property is 10% or more of the net worth of the company or INR 1 billion, again whichever is less.
National Company Law Tribunal, made functional with effect from 1st June 2016. NCLT adjudicates on all corporate law matters in a time-bound manner.
Paying taxes Payments
India made paying taxes easier by replacing many indirect taxes with a single one (the GST) for the entire country. India also made paying taxes less costly by reducing the corporate income tax rate and the employees’ provident funds scheme rate paid by the employer.
Trading across borders
India reduced the time and cost to export and import through various initiatives implemented under the National Trade Facilitation Action Plan 2017-2020, including the implementation of electronic sealing of containers, the upgrading of port infrastructure and allowing electronic submission of supporting documents with digital signatures.
Though India is currently battling a volatile rupee and a widening current account deficit, the jump in India’s ranking of ease of doing business is commendable. It’s safe to assume that it will encourage both domestic and overseas investments in India.
INDIAN GOVERNMENT TIGHTENS NORMS FOR E-COMMERCE COMPANIES
4 March 2019
The Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry, of the Government of India, issued Press Note No 2 (2018 Series) on 26 December 2018 (PN 2 of 2018). The PN2 of 2018 provides clarity as to the Foreign Direct Investment (FDI) policy on the e-commerce sector and amends para – 22.214.171.124 of the Consolidated FDI Policy Circular 2017. Effective date of PN2 of 2018 is 1 February 2019.
The FDI policy on e-commerce, first pronounced through Press Note 2 of 2000, permitted 100% FDI in B2B e-commerce activities, subject to certain conditions. However, FDI in entities engaged in B2C e-commerce, which is multi-brand retail through an inventory-based model, has all along remained prohibited for FDI. Accordingly, through the latest PN2 of 2018, the Indian government has reiterated the policy provisions to ensure better implementation of the policy.
100% FDI under automatic route is permitted in the marketplace model of e-commerce.
FDI is not permitted in the inventory-based model of e-commerce.
Under the PN2 regime, the ownership and control of inventory (goods purported to be sold) of the seller is not permitted. Furthermore, if more than 25% of the seller’s inventory is purchased from the marketplace entity or its group companies, then such inventory of the seller will be deemed to be controlled by the market place entity.
But it’s difficult for online marketplaces to track or monitor all sales from any vendor, given a vendor is free to sell their products across multiple online platforms and even offline. Furthermore, if platforms realise that the threshold of 25% percent has been crossed, they cannot recall or cancel a transaction that has already taken place to rectify the situation.
A seller having equity participation by marketplace entity or its group companies will not be permitted to sell its products on the platform run by such a marketplace entity.
Services provided by the marketplace entity or other entities in which marketplace entity has direct or indirect equity participation, to the seller on their platform should be at an arm’s length basis and in a fair and non-discriminatory manner. Similarly, cash-back offer & provided by marketplace entity to buyers shall be fair and non-discriminatory.
e-commerce entities providing a marketplace will not directly or indirectly influence the sale price of goods and services and shall maintain a level playing field.
Marketplace entities will be prohibited from mandating any seller to sell any product exclusively on their platform. But there is no guidance on how enforcing authorities would determine if a seller has been “mandated” to sell its products exclusively on an e-commerce platform, or it was a voluntary act.
e-commerce market place entity will be required to furnish a certificate, along with a report of the Statutory Auditor to Reserve Bank of India, confirming compliance of the guidelines.
Although PN2 of 2018 is an attempt in right direction to make the marketplace model more robust and transparent, there are various concerns that require further clarity and immediate attention.
India Shines on World Bank's "Ease of Doing Business Index"
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