Make In India 2.0 – Part 2

FDI Policy Reforms in sectors listed under Make in India since May 2014-15

  1. Defence sector: India incurs huge expenditure on imports of defence equipment as the domestic defence industry has not been able to meet the expectations of the present times. The sector is capital intensive and requires advance technologies. Earlier FDI regime permitted 49% FDI participation in the equity of a company under automatic route.  FDI above 49% was permitted through Government approval on case to case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country. In this regard, the following changes have inter-alia been brought in the FDI policy on this sector:
  2. Foreign investment beyond 49% has now been permitted through government approval route, in cases resulting in access to modern technology in the country or for other reasons to be recorded.
  3. FDI limit for defence sector has also been made applicable to Manufacturing of Small Arms and Ammunition covered under Arms Act 1959.
  4. Pharmaceutical: With the objective of making the sector more attractive to foreign investors, 74% FDI under automatic route has been permitted in brownfield pharmaceuticals. FDI beyond 74% is allowed through government approval route. ‘Non-compete’ clause would not be allowed in automatic or government approval route except in special circumstances with the approval of the Foreign Investment Promotion Board.

FDI in brownfield pharmaceuticals, under both automatic and government approval routes, is subject to compliance of following conditions:

    1. The production level of National List of Essential Medicines (NLEM) drugs and/or consumables and their supply to the domestic market at the time of induction of FDI, being maintained over the next five years at an absolute quantitative level. The benchmark for this level would be decided with reference to the level of production of NLEM drugs and/or consumables in the three financial years, immediately preceding the year of induction of FDI.  Of these, the highest level of production in any of these three years would be taken as the level.
    2. R&D expenses being maintained in value terms for 5 years at an absolute quantitative level at the time of induction of FDI.  The benchmark for this level would be decided with reference to the highest level of R&D expenses which has been incurred in any of the three financial years immediately preceding the year of induction of FDI
    3. The administrative Ministry will be provided complete information pertaining to the transfer of technology, if any, along with induction of foreign investment into the investee company.
  1. Medical Devices: India has achieved an eminent global position in pharma sector. However, same has not been replicated in the medical devices industry. The country has huge pool of scientists and engineers who have potential to take medical device industry to a very high level. Domestic capital market is not able to provide much needed investment in the sector. The government has therefore permitted FDI up to 100% under the automatic route for manufacturing of medical devices, without any distinction of greenfield or brownfield and such FDI will not be subjected to other conditions of the FDI policy on the pharmaceutical sector.
  2. Food Product Retail Trading: 100% FDI under government approval route has been permitted for trading, including through e-commerce, in respect food products manufactured and/or produced in India. This will benefit farmers, give impetus to food processing industry and create vast employment opportunities.
  3. Rail Infrastructure: The modernization of Railways requires very large amount of capital investment.  This makes foreign investment imperative in rail infrastructure especially in highly capital and technology intensive areas like suburban corridors, high speed train systems, train sets, railway rolling stock including locomotives/coaches, railway electrification, signaling systems dedicated freight line projects. Accordingly the Government with view to attract foreign investment in the sector has opened following activities of Rail infrastructure to 100% under automatic route:

Construction, operation and maintenance of (i)  Suburban corridor projects through PPP, (ii)  High speed train projects, (iii) Dedicated freight lines, (iv)  Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities, (v) Railway Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger terminals, (ix)  Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x)  Mass Rapid Transport Systems.

However, FDI beyond 49% of the equity of the investee company in sensitive areas from security point of view, will be brought before the Cabinet Committee on Security (CCS) for consideration on a case to case basis.

  1. Construction Development sector:Investment in the construction development sector remains a priority of the Government as it results in infrastructure creation; employment generation from unskilled workers to engineers, architects, designers as well as financial and other supporting services. FDI policy on Construction Development permits 100% foreign investment under automatic route subject to certain conditions. In order to liberalize and bring pragmatism in the policy so as to attract more foreign investment in the country not only in large infrastructure projects but also in held-up and smaller projects following amendments have introduced in the FDI policy on the sector:
  1. Removal of conditions of area restriction of floor area of 20,000 sq. mtrs in construction development projects and minimum capitalization of US $ 5 million to be brought in within the period of six months of the commencement of business.
  2. Exit and repatriation of foreign investment is now permitted after a lock-in-period of three years. Transfer of stake from one non-resident to another non-resident, without repatriation of investment is also neither to be subjected to any lock-in period nor to any government approval.
  3. Exit is permitted at any time if project or trunk infrastructure is completed before the lock-in period.
  4. 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centers.
  5. It has been clarified that ‘real-estate broking service’ does not amount to real estate business and is therefore, eligible for 100% FDI under automatic route.
  6. Civil Aviation Sector: Foreign equity cap of activities of Non-Scheduled Air Transport Service, Ground Handling Services have been increased from 74% to 100% under the automatic route. With a view to aid in modernization of the existing airports to establish a high standard and help ease the pressure on the existing airports, 100% FDI under automatic route has been allowed in Brownfield Airport projects.

FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service raised to 100%, with FDI upto 49% permitted under automatic route and FDI beyond 49% through Government approval. For NRIs, 100% FDI will continue to be allowed under automatic route. However, foreign airlines would continue to be allowed to invest in capital of Indian companies operating scheduled and nonscheduled air­ transport services up to the limit of 49% of their paid up capital and subject to the laid down conditions in the existing policy.

As per the earlier policy, foreign airlines were allowed to invest under Government approval route in the capital of Indian companies operating scheduled and nonscheduled air transport services, up to the limit of 49% of their paid-up capital. However, this provision was not applicable to M/s Air India Ltd., thereby implying that foreign airlines could not invest in Air India. Now, foreign investment(s) in Air India has been allowed, including that of foreign airline(s), up to 49% either directly or indirectly. Substantial ownership and effective control of Air India shall continue to be vested in Indian Nationals.

Further, Union Cabinet in its meeting on March 4, 2020; permitted foreign investment(s) in M/s Air India ltd. By NRIs, who are Indian Nationals, upto 100% under automatic route.

  1. Manufacturing Sector: In order to provide boost to the manufacturing sector and give impetus to the ‘Make in India’ initiative, the Government has permitted a manufacturer to sell its product through wholesale and/or retail, including through e-commerce under automatic route.
  2. Contract Manufacturing: In order to provide clarity on contract manufacturing, it has been decided to allow 100% FDI under automatic route in contract manufacturing in India as well. Subject to the provisions of the FDI policy, foreign investment in ‘manufacturing’ sector is under automatic route. Manufacturing activities may be conducted either by the investee entity or through contract manufacturing in India under a legally tenable contract, whether on Principal to Principal or Principal to Agent basis.
  3. Other Financial Services: Government has reviewed FDI policy on Other Financial Services and NBFCs to provide that foreign investment in financial services activities regulated by financial sector regulators such as RBI, SEBI, IRDA etc. will be 100% under the automatic route. In financial services, which are not regulated by any financial sector regulator or where only part of the financial service activity is regulated or where there is doubt regarding regulatory oversight, foreign investment upto 100% will be allowed under the government approval route.
  4. 11.Insurance & Pension Sectors: FDI Policy on Insurance sector was reviewed in view of amendment to the Insurance Laws (Amendment) Act 2015 to increase the sectoral cap of foreign investment from 26% to 49%. Further it has been provided that FDI in the sector would be permitted under automatic route. Similar changes have also been brought in the FDI Policy on Pension Sector.
  5. Banking-Private sector: Government introduced full fungibility of foreign investment in Banking-Private sector. Accordingly, FIIs/FPIs/QFIs, following due procedure, can now invest up to sectoral limit of 74%, provided that there is no change of control and management of the investee company.
  6. Insurance Intermediaries: Vide Press Note 1(2020)100% FDI has been permitted in Intermediaries or Insurance Intermediaries including insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, Surveyors and Loss Assessors and such other entities, as may be notified by the Insurance Regulatory and Development Authority from time to time.
  7. Digital Media: The extant FDI policy provides for 49% FDI under approval route in Up-linking of ‘News & Current Affairs’ TV Channels. However, the policy does not have any specific provision pertaining to broadcasting of content through digital media. In the background of free mushrooming of news/ other content over the internet and possibly over the mobile, it is important that this gap in the FDI policy is addressed and the provisions governing foreign investment in the activity are clearly spelt out. Accordingly, 26% FDI under government route has been permitted for uploading/ streaming of News & Current Affairs through Digital Media.

 

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