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The NDA government recently announced, what it termed, a “radical liberalization” of the Foreign Direct Investment (FDI) regime by easing norms for a host of important sectors including defense, civil aviation and pharmaceuticals, opening them up for complete foreign ownership. With these changes, India is now the most open economy in the world for FDI.

The decision on FDI reforms, taken at a high-level meeting chaired by Prime Minister Narendra Modi, also included paving the way for companies such as Apple Inc to immediately set shop in India.

However, the government has tightened rules for such companies producing items with cutting-edge and state-of-art technology -- by giving them only a “three-year blanket exemption from the 30 per cent local sourcing norm over and above the five years where the 30 per cent procurement requirement would have to be met as an average of five years’ total value of the goods purchased”. This is to ensure that they manufacture in India rather than making profits through just trading activities. The major development done by the government are :

1. Foreign Investment in Defense Sector up to 100%

In defense, foreign investment beyond 49 per cent (and upto 100 per cent) has been permitted through the government approval route, in cases resulting in access to modern technology in the country. The condition of access to ‘state-of-art’ technology in the country has been done away with, as many foreign investors had complained about the ambiguity regarding that term.

2. Radical Changes for promoting Food Products manufactured/produced in India

The decisions included permitting 100 per cent FDI under government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India, bringing into effect the proposal made in the Budget 2016-17.

3. Pharmaceutical

The extant FDI policy on pharmaceutical sector provides for 100% FDI under automatic route in Greenfield pharma and FDI up to 100% under government approval in Brownfield pharma. With the objective of promoting the development of this sector, it has been decided to permit up to 74% FDI under automatic route in Brownfield pharmaceuticals and government approval route beyond 74% will continue.

4. Civil Aviation Sector

The government has permitted 100 per cent FDI in India-based airlines. However, a foreign carrier can only own upto 49 per cent stake in the venture, and the rest can come from a private investors including those based overseas. This is expected to bring in more funds into domestic airlines. To boost airport development and modernization, 100 per cent FDI in existing airport projects has been allowed without government permission, from 74 per cent permitted so far. The move comes close on the heels of the new civil aviation policy that relaxed norms for domestic carriers to fly abroad.

5. Private Security Agencies

The extant policy permits 49% FDI under government approval route in Private Security Agencies. FDI up to 49% is now permitted under automatic route in this sector and FDI beyond 49% and up to 74% would be permitted with government approval route.

6. Establishment of branch office, liaison office or project office

For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, it has been decided that approval of Reserve Bank of India or separate security clearance would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted. 

7. Animal Husbandry

As per FDI Policy 2016, FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and Apiculture is allowed 100% under Automatic Route under controlled conditions. It has been decided to do away with this requirement of ‘controlled conditions’ for FDI in these activities.

Thus the above has come out to be a crucial step to liberalize and simplify the FDI policy so as to provide ease of doing business in the country leading to larger FDI inflows contributing to growth of investment, incomes and employment. But also the challenges are coming up that whether the policy will pertain to India’s dream growth objective or will it lash out the Domestic R&D, or cause impede to the domestic socio-economic development.

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Published by

CA Saurabh Singh
(Practising Chartered )
Category Corporate Law   Report

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