India’s cabinet liberalizes the foreign direct investment regime

Sep 10, 2019


Addressing India’s need to attract investments to revitalize its economy, on August 28, 2019, the Union Cabinet (the “Cabinet”) has approved a number of changes to the foreign direct investment (“FDI”) regime.  The reforms cover the single brand retail trading (“SBRT”), digital media and coal mining sectors.  This update discusses the key changes approved by the Cabinet.

SBRT sector

The current FDI framework in the SBRT sector, among others, imposes a mandatory local sourcing requirement of 30% of the average value of the goods to be purchased from India during the first five (5) years, and thereafter, annually towards the Indian operations.  Moreover, single brand retailers can commence online sales only after establishing at least one (1) physical store.

Now, it is, inter alia, proposed that:

  • all procurement undertaken by single brand retailers for that single brand from India will be counted towards the local sourcing requirement, without regard to the fact that the goods procured are sold in India or exported.
  • the set off of goods sourced from India for global operations against the local sourcing rule, which was earlier allowed only for five (5) years from the 1st of April of the year in which the first store was opened, has been removed, i.e., goods sourced from India for global operations can be used to set off the local sourcing requirement even beyond the initial five (5) years.
  • sourcing done either directly by a single brand retailer or its group companies, or under a legally enforceable agreement through a third party will be considered as sourcing of goods from India for compliance purposes.
  • for the purpose of counting the local sourcing requirement, the entire sourcing from India for global requirements will be considered without any incremental value, which was the case before.

Complying with the local sourcing requirement was a stumbling block for global brands seeking to establish their operations in India.  These changes are welcome and will definitely ease the burden of sourcing from India.  In addition, these changes take into account the operational aspects of sourcing which, in most sectors, takes place through distributors and sourcing agents.

Lastly, single brand retailers will be permitted to commence e-commerce operations prior to setting up brick and mortar stores, subject to the condition that the entity opens a brick and mortar store within two (2) years from date of commencement of e-commerce operations.  As India’s e-commerce sector is booming, this liberalization will incentivize brands to set up shop in India.

Coal mining sector

The current framework permits up to 100% FDI under the automatic route for coal and lignite mining for captive consumption by power producers, iron, steel and cement units, and coal processing plants.  Now, relaxing the norms further, up to 100% FDI under the automatic route for coal mining (including associated processing infrastructure) as well as the sale and export of coal has been permitted, subject to applicable laws.  The changes brought in the coal mining sector will likely end the monopoly of Coal India in this sector, and attract international investors to compete and create an efficient coal market.  However, Coal India being a public sector company with a large work force may oppose this move.

Contract manufacturing

The Cabinet has clarified that up to 100% FDI shall be permitted in contract manufacturing under the automatic route.  Therefore, companies having FDI can conduct manufacturing activities by themselves or engage a local contract manufacturer to perform the manufacturing activities.  While the contract manufacturing structure has been prevalent in India for many years now across sectors, this clarification is welcome, as there was some interpretational uncertainty.

Digital media

The Cabinet has permitted up to 26% FDI for uploading and streaming of news and current affairs through digital media under the approval route.  This change has been brought to align digital news with the FDI norms applicable to the print media sector.  However, previously, the FDI limit was 49% under the approval route for up-linking of news and current affairs television channels.  This reduction in limits will pose problems for some digital news companies who have foreign investment up to 49%.

Majmudar & Partners is a leading foreign investment advisory law firm in India.  Our team is available to assist clients and prospects, especially in the e-commerce and retail sectors, where there continues to be significant activity, notwithstanding the slowness in other parts of the Indian economy.

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