Cabinet Approves Proposal for Review of FDI Policy on Various
Sectors
[PIB
Press Release dated 28 August 2019]
The Union Cabinet chaired by the Prime Minister Narendra
Modi has approved the proposal for Review of Foreign Direct Investment on
various sectors.
Major Impact and Benefits from FDI Policy Reform
1.
The changes in FDI policy will result
in making India a more attractive FDI destination, leading to benefits of
increased investments, employment and growth.
2.
In the coal sector, for sale of coal,
100% FDI under automatic route for coal mining,activities including associated processing
infrastructure will attract international players to create an efficient and
competitive coal market.
3.
Further, manufacturing through contract
contributes equally to the objective of Make in India. FDI now being permitted under automatic route in contract
manufacturing will be a big boost to Manufacturing sector in India.
4.
Easing local sourcing norms for FDI in
Single Brand Retail Trading (SBRT) was announced in
Union Budget Speech of Finance Minister. This will lead to greater flexibility
and ease of operations for SBRT entities, besides creating a level playing
field for companies with higher exports in a base year. In addition, permitting
online sales prior to opening of brick and mortar stores brings policy in sync
with current market practices. Online sales will also lead to creation of jobs
in logistics, digital payments, customer care, training and product skilling.
5.
The above amendments to the FDI Policy are meant to liberalize and simplify the FDI policy to
provide ease of doing business in the country, leading to larger FDI inflows
and thereby contributing to growth of investment, income and employment.
Background
FDI is a major driver of economic growth and a source of
non-debt finance for the economic development of the country. Government has
put in place an investor friendly policy on FDI, under which FDI up to 100% is permitted on the automatic route in most sectors/
activities. FDI policy provisions have been progressively
liberalized across various sectors in recent years to make India an
attractive investment destination. Some of the sectors include Defence, Construction Development, Trading,
Pharmaceuticals, Power Exchanges, Insurance, Pension, Other Financial Services,
Asset reconstruction Companies, Broadcasting and Civil Aviation.
These reforms have contributed to India attracting record
FDI inflows in the last 5 years. Total FDI into India from 2014-15 to 2018-19
has been US $ 286 billion as compared to US $ 189 billion in the 5-year period
prior to that (2009-10 to 2013-14). In fact, total FDI in 2018-19 i.e. US $
64.37 billion (provisional figure) is the highest ever FDI received for any
financial year.
Global FDI inflows have been facing headwinds for the last
few years. As per UNCTAD's World Investment Report 2019, global foreign direct
investment (FDI) flows slid by 13% in 2018, to US $1.3 trillion from US $1.5
trillion the previous year - the third consecutive annual decline. Despite the
dim global picture, India continues to remain a preferred and attractive
destination for global FDI flows. However, it is felt that the country has the
potential to attract far more foreign investment which can be
achieved inter-alia by further liberalizing and simplifying the FDI policy
regime.
In Union Budget 2019-20, Finance Minister proposed to further consolidate the gains under FDI in order to make
India a more attractive FDI destination. Accordingly, the Government has
decided to introduce a number of amendments in the FDI Policy. Details of these
changes are given in the following paragraphs.
Coal Mining
As per the present FDI policy, 100% FDI under automatic
route is allowed for coal & lignite mining for
captive consumption by power projects, iron & steel and cement units and
other eligible activities permitted under and subject to applicable laws and
regulations. Further, 100% FDI under automatic route is also
permitted for setting up coal processing plants like washeries
subject to the condition that the company shall not do coal mining and shall
not sell washed coal or sized coal from its coal processing plants in the open
market and shall supply the washed or sized coal to those parties who are
supplying raw coal to coal processing plants for washing or sizing.
It has been decided to permit 100% FDI under automatic route
for sale of coal, for coal mining activities including associated processing
infrastructure 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.
"Associated Processing Infrastructure" would include coal washery, crushing, coal handling, and separation (magnetic
and non-magnetic)
Contract Manufacturing
·
The extant FDI policy provides for 100%
FDI under automatic route in manufacturing sector. There is no specific
provision for Contract Manufacturing in the Policy. 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.
Single Brand Retail Trading (SBRT)
1.
The extant FDI Policy provides that 30%
of value of goods has to be procured from India if
SBRT entity has FDI more than 51%. Further, as regards local sourcing
requirement, the same can be met as an average during the first 5 years, and
thereafter annually towards its India operations. With a view to provide
greater flexibility and ease of operations to SBRT entities, it has been
decided that all 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. Further, the current cap of
considering exports for 5 years only is proposed to be
removed, to give an impetus to exports.
2.
The extant Policy provides that as
regards local sourcing requirement, incremental sourcing for global operations
by the non-resident entities undertaking single brand retail trading, either
directly or through their group companies, will also be
counted towards local sourcing requirement for the first 5 years.
However, prevalent business models involve not only sourcing from India for
global operations by the entity or its group companies, but also through an
unrelated third Party, done at the behest of the entity undertaking single
brand retail trading or its group companies. In order to cover such business
practices, it has been decided that '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.
3.
The extant policy provides that only
that part of the global sourcing shall be counted towards local sourcing requirement which is over and above the previous year's
value. Such requirement of year-on-year incremental increase in exports induces
aberrations in the system as companies with lower exports in a base year or any
of ' the subsequent years can meet the current requirements, while a company
with consistently high exports gets unduly discriminated against. It has been now decided that entire sourcing from India for
global operations shall be considered towards local sourcing requirement. (And
no incremental value)
4.
The present policy requires that SBRT
entities have to operate through brick and mortar stores before starting retail
trading of that brand through e-commerce. This creates an artificial
restriction and is out of sync with current market
practices. It has therefore been decided that retail
trading through online trade can also be undertaken prior to opening of 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. Online sales
will lead to creation of jobs in logistics, digital payments, customer care,
training and product skilling.
Digital Media
The extant FDI policy provides for 49% FDI under approval
route in Up-linking of 'News &Current Affairs' TV Channels. It has been decided to permit 26% FDI under government route
for uploading/ streaming of News & Current Affairs through Digital Media,
on the lines of print media.