Revised FDI Norms under FEMA

Revised FDI Norms under FEMA

Foreign direct investment or FDI is an investment made by an foreign entity in India. Generally, FDI takes place when an investor establishes business operations or acquires business assets in India, including establishing ownership or controlling interest in a India company.

It frequently involves more than just capital investment. It may include provisions of management or technology as well. The key feature of FDI is that it establishes either effective control of, or at least substantial influence over, the decision-making of a entity in India. 

India is a developing nation that is trying to make its way up the ladder in the world economy. To achieve its goal, it requires an influx of investment, both national and international. Foreign nations often keep an eye on fast-growing economies and are keen to invest in markets where they expect great interests in the future. 

India allows FDI through two routes- 

  1. Automatic  :No prior approval is required
  2. Government/Approved route: , This route cannot be accessed without approval from the Government of India.

The Government of India amended FDI policy in 2014 to increase the inflow of FDI. FDI in 25 sectors was increased to up to 100% along with up to 49% in the insurance sector. Following this, India became the top destination for FDI overtaking China and the USA. The sectors that can not  avail FDI include lottery business, chit funds, casinos, Nidhi companies, real estate, railways and a few others. 

1. What are the revised FDI Norms in India

India recently revised its FDI policy with the objective of “curbing opportunistic takeovers or acquisitions of Indian companies due to the current COVID-19 pandemic”. The government announced its latest consolidated foreign direct investment (FDI) policy, which is in effect from October 15, 2020 (as per the official circular, DPIIT File Number 5(2)/2020-FDI Policy dated October 15, 2020, released by the government).

  • In terms of the amended FDI rule- “An entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can now invest only through the Government/Approved route¨. 
  • Moreover, for existing or future FDIs  any transfer of ‘beneficial ownership’ as above, involving  a resident of a neighbouring country, the procedure of sanction has to go through the government approval route.

The change is a big departure from the earlier norm of a blanket approval of all FDI except in the prohibited strategic sectors /activities. By redirecting all investments, both existing and new ones, from neighbouring countries sharing land borders to government channels –  the final approval may be delayed or not even granted.

2. Key highlights of India´s 2020 consolidated FDI policy

1. Scrutiny of investments from India´s neighboring countries by the Government

Foreign investments from these neighboring countries and beneficiaries of such investment in India who are situated in or are citizens of any such country – are to be vetted by the government irrespective of the scope of the investment. 

In fact, according to a government official, given that there is no mention of a minimum or a maximum threshold limit – even if the foreign investment from such a country is a fraction or small amount, it will trigger government scrutiny.  

The circular states:

  1. An entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country – can invest only under the Government approval route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route. No such investment is allowed from Pakistan in defense, space, atomic energy and sectors/activities that are prohibited for foreign investment.
  2. In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, results in the beneficial ownership falling within the restriction/purview of the above – this will also require Government approval.

2. Entry route for investment into India and the approving authorities for the Government route

Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the automatic route or the government route.

  • Under the automatic route, the non-resident investor or the Indian company does not require any approval from the government of India for the investment.
  • Under the government route, prior approval of the government of India is required. Proposals for foreign investment under government route, are considered by the respective administrative ministry/department.
S.No.Economic Activity/SectorApproving Authority
 MiningMinistry of Mines
Items requiring industrial license under the Industries (Development & Regulations) Act, 1951, and/or Arms Act, 1959 for which the power have been delegated by Ministry of Home Affairs to the Department for Promotion of Industry and Internal Trade (DPIIT)
Manufacturing of Small Arms and Ammunitions covered under Arms Act, 1959

Department of Defense Production, Ministry of Defense

Ministry of Home Affairs
3.BroadcastingMinistry of Information and Broadcasting
4. Print media and Digital mediaMinistry of Information and Broadcasting
5. Civil AviationMinistry of Civil Aviation
6. SatellitesDepartment of Space
7.TelecommunicationDepartment of Telecommunications
8.Private security agenciesMinistry of Home Affairs
9 (i)Application involving investments from an entity of a country that shares a land border with India or where the beneficial owner of an investment into India is situated in, or is a citizen of any such country.Concerned administrative ministry/department as identified by the DPIIT
9 (ii)Cases pertaining to sectors/activities under Government approval route requiring security clearance as per the extent of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, FDI Policy and security guidelines, as amended from time to time.Nodal administrative ministries/departments
10.Trading (Multi brand and Food products retail trading)DPIIT
11. FDI proposals by NRIs/Export-Oriented Units requiring approval of the Government.Concerned administrative ministry/department as identified by the DPIIT
12.Applications relating to issue of equity shares under the FDI policy under the Government route for Import of capital goods/machinery/equipment (excluding second-hand machinery).Concerned administrative ministry/department as identified by the DPIIT
13.Applications relating to issue of equity shares for pre-operative/pre-incorporation expenses.Concerned administrative ministry/department as identified by the DPIIT
14.Financial services activity, which are not regulated by any Financial Sector Regulator or where only part of the financial services activity is regulated or where there is doubt regarding the regulatory oversight.Department of Economic Affairs
15.Applications for foreign investment into a core investment company or an Indian company engaged only in the activity of investing in the capital of other India company/companies.Department of Economic Affairs
16. Banking (Public and Private)Department of Financial Services
17. PharmaceuticalsDepartment of Financial Services

3. Compliance obligations for e-commerce entities

The latest FDI policy states that it is mandatory for e-commerce entities with foreign investment to obtain and maintain a statutory audit report by September 30 every year for the preceding financial year, which indicates their compliance with India’s laws. This compliance requirement was first introduced in 2019.

The 2020 FDI policy circular also details the recent changes in regulating foreign investment in e-commerce in India, which includes the following:

  • Prohibiting an entity related by equity to the e-commerce platform from doing business on the website portal;
  • Restricting vendors from buying more than 25 percent of their inventory from the platform and its group companies; and
  • Banning exclusive product launches.

4. Investment cap on digital news media

A 26 percent cap on equity / FDI has been introduced in the segment that covers digital news (uploading or streaming of news and current affairs through digital media), which also requires government approval. This brings it at par with the investment cap on newspaper and periodical publications and the publication of Indian editions of foreign magazines dealing with news and current affairs, which are also subject to the government approval route. Detailed guidelines on foreign direct investment into the broadcasting sector are provided in Annexure-6 of the circular. 

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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