LEGAL UPDATES



Highlights of the Foreign Direct Investment (FDI) Policy Download as PDF

01-08-2017

Introduction

With a view to further boost the ‘ease of doing business in India’ and the ‘start-up India’ initiatives, the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, published the Consolidated FDI Policy Circular of 2017 (the “Policy”) on August 28, 2017. The Policy, which is updated on a yearly basis, is a compendium of all significant changes in the FDI Policy over the last year. Summarized below are some of the key changes in the Policy.

Start-ups take a centre stage in the Policy

Start-ups have been specifically included in the Policy for the first time. They can raise up to 100% of their capital from Foreign Venture Capital Investors (FVCIs) and can issue equity, equity liked instruments or debt instruments against the receipt of foreign remittance. In addition, start-ups may issue convertible notes to persons resident outside India (other than citizens or entities of Pakistan or Bangladesh), in accordance with the procedure prescribed in the Policy. Also, such persons are permitted to purchase convertible notes issued by an Indian start-up for up to INR 25 lakhs or more in a single tranche. Further, non-resident Indians have been allowed to acquire convertible notes on a non-repatriation basis.

However, prior government approval is required for issue of convertible notes to non-resident by start-ups which are engaged in sectors which require government approval.

Other highlights of the Policy

  • To harmonize the definition of “Venture Capital Fund” (VCF), the Policy has amended it to include Funds which are registered as VCF under the SEBI (Venture Capital Funds) Regulations, 1996.
  • Following the abolishment of the Foreign Investment Promotion Board (FIPB) earlier this year, the Policy now captures the procedure for seeking Government approval. Additional foreign investment up to a cumulative amount of INR 5,000 crore into the same entity within an approved foreign equity percentage/or into a wholly owned subsidiary will not require fresh prior Government approval.
  • LLPs (i) having foreign investment; (ii) operating in sectors/ activities where 100% FDI is allowed through the automatic route; and (iii) where there are no FDI linked performance conditions, are permitted to convert into a company under the automatic route. Similarly, a company having foreign investment, operating in sectors/ activities where 100% FDI is allowed through automatic route and there are no FDI-linked performance conditions, is permitted to convert into a LLP under the automatic route.
  • Downstream investment by eligible Indian entities/LLPs is now required to be notified to the RBI and the Foreign Investment Facilitation Portal instead of the Secretariat of Industrial Assistance (SIA) and FIPB.
  • In the manufacturing sector, 100% FDI under the Government approval route is allowed for retail trading, including through e-commerce, in respect to food products manufactured or produced in India.
  • A wholesaler/cash and carry trader can undertake single brand and multi brand retail business subject to the applicable conditions.
  • An E-commerce entity will not permit more than 25% of the sales value on financial year basis affected through its marketplace from one vendor or their group companies.
  • For sourcing requirements of Single Brand Product Retail Trading, a Committee under the Chairmanship of Secretary, DIPP, with representatives from NITI Aayog, concerned Administrative Ministry and independent technical expert(s) on the subject will be formed. This Committee will examine the claim of applicants on the issue of the products being in nature of “state-of-art” and “cutting-edge technology” where local sourcing is not possible and provide recommendations for relaxation of sourcing requirements.
  • As regards the Pension sector, Indian Pension Funds should ensure that their ownership and control remains, at all times, in the hands of resident Indian entities as determined by Government or Pension Fund Regulatory and Development Authority.
  • A wholly owned subsidiary incorporated in India by a non-resident entity, operating in a sector where 100% foreign investment is permitted through automatic route and there are no FDI linked restrictions, can, in line with FEMA Regulations, issue equity shares, preference shares, convertible debentures or warrants to its non-resident holding entity against the pre-incorporation/ pre-operative expenses up to a limit of 5% of its capital or USD 500,000 whichever is less, subject to certain conditions.

Conclusion

The FDI flows into India have nearly doubled over the last decade to reach USD 42 billion in fiscal year 2016-17. And during the first quarter of this fiscal year, the FDI into India rose to USD 10.4 billion, which is a 37% increase over the last year. The Policy issued by the government is a yet another move to attract more FDI and the inclusions of start-ups will assist in creating more lucrative jobs and encourage innovation.

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