Government Relaxes FDI Norms For Single Brand Retail

Author: thinkinglegal | September 2, 2019 - 16:58 | Tags: Regulatory Advisory

In recent years, FDI policy provisions have been progressively liberalized by the Central Government across various sectors to make India an attractive investment destination. On 29 August 2018, the Central Government notified additional investor friendly reforms for Foreign Direct Investment (FDI) Policy in various sectors, namely, single-brand retail, coal mining, digital media and contract manufacturing. This is an effort to facilitate and to ease the foreign investments in India. These changes in FDI policy will result in making India a more attractive destination, leading to benefits of increased investments, employment and growth.

1. Relaxed FDI norms for Single Brand Retail Trading

Procurements made from India can also be exported: The extant FDI Policy provides that 30% of the value of goods has to be procured from India if Single Brand Retail Trading (“SBRT”) entity has FDI more than 51%. Further, as regards local sourcing requirement, the same can be met as an average during the first five years and thereafter annually towards its India operations. The extract from the FDI Policy has been reproduced below:

“In respect of proposals involving foreign investment beyond 51 %, sourcing of 30 % of the value of goods purchased, will be done from India, preferably from MSMES, village and cottage industries, artisans and craftsmen, in all sectors. The quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. This procurement requirement would have to be met, in the first instance, (as an average of five years' total value of the goods purchased beginning 1 April of the year of the commencement of the business i.e. opening of the first store. Thereafter, it would have to be met on an annual basis…”

Under the new reforms, the Central Government has clarified that all the procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported. Additionally, it is proposed that current cap of considering exports for 5 years only may be removed to give an impetus to exports.

Unrelated third parties can do incremental sourcing for global operations on behalf of SBRT entity/group companies: In terms of the extant FDI Policy, incremental sourcing for global operations by the SBRT entity, either directly or through its group companies is counted towards local sourcing requirement. Now “sourcing of goods from India for global operations” can be done directly by the entity undertaking SBRT or its group companies (resident or non-resident), or indirectly by them through a third party under a legally tenable agreement.

Entire sourcing from India for global operations shall be counted for the purpose of local sourcing: The extant Policy provides that only that part of the global sourcing which is over and above the previous years' value will be counted towards the local sourcing requirement. As per the new reforms, the entire sourcing from India for global operations (and not just for the incremental value) will be counted towards local sourcing requirement.

SBRT entities can start e-commerce operations without prior establishing to opening of physical stores: In the present FDI Policy, only the SBRT entities operating through brick and mortar stores were permitted to undertake retail trading through e-commerce. Now SBRT entities are allowed to undertake retail trading through e-commerce without establishing brick and mortar stores, subject to the condition that the entity opens brick and mortar stores within 2 years from date of start of online retail. This reform will lead the online sales creating jobs in logistics, digital payments, customer care, training and product skilling.

2. 100% FDI in coal mining

The FDI Policy allows 100% FDI under automatic route for coal and lignite mining for captive consumption by power projects, iron and steel, and cement units and other eligible activities. Also, 100% FDI under automatic route is also permitted for setting up coal processing plants like washeries subject to some conditions.

As per the new reforms, 100% FDI through automatic route will be allowed in coal mining and associated infrastructure including coal washery, crushing, coal handling, and separation (magnetic and non-magnetic). Further this shall be subject to provisions of Coal Mines (special provisions) Act, 2015 and the Mines and Minerals (development and regulation) Act, 1957 as amended from time to time, and other relevant acts on the subject.

3. 100% contract manufacturing

There is no specific provision for contract manufacturing in the extant policy. However, 100% FDI is allowed under the automatic route in the manufacturing sector. As per the new reforms, 100% FDI will also be allowed in contract manufacturing through the automatic route as well. Now 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.

4. 26% FDI in digital media

As per the extant FDI Policy, there was no restriction on the limit of FDI in Digital Media. However, it provides for 49% FDI under approval route in uplinking of 'News and Current Affairs' TV Channels and 26% FDI in print media sector.

 As per the new reforms, 26% FDI is permitted under government route for uploading and streaming of News & Current Affairs through Digital Media, on the lines of print media.

Impact of FDI Reforms

The Central government has not yet issued the fine print of these amendments. However, these reforms are likely to give an impetus to foreign investment in India. These changes in FDI policy will result in making India a more attractive FDI destination. The coal sector will attract international players to create an efficient and competitive coal market. The Make in India initiative has been given new wings after allowing 100% FDI in the contract manufacturing sector. Liberalizing conditions for the FDI in SBRT will lead to greater flexibility and ease of operations for SBRT entities. Further, relaxing the condition of establishing brick and mortar stores prior to undertaking retail trading through e-commerce will give a further impetus to foreign investment.