Union Cabinet approves various amendments in FDI policy

The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has given its ex-post-facto approval for the FDI policy amendments announced by the Government. The FDI policy amendments are meant to liberalise 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. 

What is FDI?

• A foreign direct investment is an investment in the form of a controlling ownership in a business enterprise in one country by an entity based in another country. It is thus distinguished from foreign portfolio investment by a notion of direct control.

The origin of the investment does not impact the definition as an FDI: the investment may be made either “inorganically” by buying a company in the target country or “organically” by expanding operations of an existing business in that country.

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

• By incorporating a wholly owned subsidiary or company anywhere
• By acquiring shares in an associated enterprise
• Through a merger or an acquisition of an unrelated enterprise
• Participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:

• Low corporate taxand individual income tax rates
• Tax holidays
• Other types of tax concessions
• Preferential tariffs
• Special economic zones
• EPZ– Export Processing Zones
• Bonded warehouses
• Maquiladoras
• Investment financial subsidies
• Free land or land subsidies
• Relocation & expatriation
• Infrastructure subsidies
• R&D support
• Derogation from regulations.

Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh.

• As Singh subsequently became the prime minister, this has been one of his top political problems, even in the current times.India disallowed overseas corporate bodies (OCB) to invest in India.
• India imposes cap on equity holding by foreign investors in various sectors, current FDI inaviation and insurance sectors is limited to a maximum of 49%.
• Starting from a baseline of less than $1 billion in 1990, a 2012UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012.
• As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI

New FDI Approvals :-

i.Food – It has now been provided that 100% FDI under automatic route for trading, including through e-commerce, is permitted in respect of food products manufactured and/or produced in India.

ii.Defense – 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.

iii.Pharma – The earlier 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, 74% FDI under automatic route has been permitted in brownfield pharmaceuticals.

iv.Civil aviation – As per the earlier FDI policy, foreign investment up to 49% was allowed under automatic route in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service. This limit has now been raised to 100%, with FDI upto 49% permitted under automatic route and FDI beyond 49% through Government approval.

v.Private Security – The earlier policy permitted 49% FDI under government approval route in Private Security Agencies. Since Private Security Agencies are already required to get license under PSAR Act 2005, the requirement of putting them through another line of Government approvals through FIPB has now been done away with for FDI up to 49%.  Accordingly, FDI up to 49% is now permitted under automatic route in this sector.

vi.Branch office Establishment – 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 provided that approval of Reserve Bank of India would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted.

vii.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. The requirement of ‘controlled conditions’ for FDI in these activities has now been done away with. 

viii-Local sourcing – norms have been relaxed up to three years, with prior Government approval, for entities undertaking Single Brand Retail Trading of products having ‘state­ of ­art’ and ‘cutting edge’ technology. For such entities, sourcing norms will not be applicable up to three years from commencement of the business i.e. opening of the first store for entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible. Thereafter, sourcing norms would be applicable.