Insights
FDI policy change for select industry sectors
August 1, 2019On 28 August 2019, the Union Cabinet approved various amendments to the FDI policy pertaining to the coal mining, contract manufacturing, single brand retail trading (SBRT) and digital media sectors with a view to attract and retain FDI in India. The changes are as follows:
Coal Mining
100% FDI has now been permitted 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 and related legislations. “Associated Processing Infrastructure” includes coal washery, crushing, coal handling, and separation (magnetic and non-magnetic).
Under the extant policy, 100% FDI under automatic route is allowed for coal & lignite mining for captive consumption by power projects, iron and steel and cement units and other eligible activities . The same 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.
SAM & Co comment
The Coal Mines Special Provisions Act, 2015 introduced the concept of coal ‘mining for sale’, paving way for commercial mining in the coal sector, i.e. sale of coal in the market by entities receiving coal mines pursuant to an auction process. Pursuant to the recent FDI liberalisation, 100% FDI is now permitted under the automatic route, inter alia, for sale of coal, coal mining activities and contract manufacturing. The recent FDI liberalisation, coupled with the Government of India’s plan to auction coal mines with commercial sale as a permitted end use, is likely to open a huge market for international and domestic coal producers and create a strong competition for Coal India Ltd and other suppliers. The said amendment creates a vast opportunity for global mining companies to access the Indian market. This change is likely to create an avenue for revamping of the sector with improved technology and state of the art machinery. That said, for meaningful competition to subsist and to overcome the shortage of fuel supply, it would be necessary to release or make available sufficient quantities of appropriate grade of coal in the market.
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Contract Manufacturing
In addition to permitting 100% FDI in the manufacturing sector under the automatic route, 100% FDI under automatic route in contract manufacturing is now allowed. The extant policy had no specific provision for FDI in contract manufacturing although manufacturing activities were allowed to be conducted either by the investee entity or through contract manufacturing in India under a legally tenable contract on Principal to Principal or Principal to Agent basis. The present amendment provides clarity in this regard.
SAM & Co comment
FDI liberalisation in the contract manufacturing sector will open up avenues for foreign investments in this sector and result in job creation and inflow of foreign direct investment. Several global players have been planning and waiting for a long time to set up India as a parallel manufacturing hub, and the recent liberalisation will result in a lot of churning in the economy. These reforms demonstrate the Government’s resolve to deal with the economic slowdown effectively.
Single Brand Retail Trading (SBRT)
- 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. [The extant Policy provides that 30% of value of goods has to be procured from India if SBRT entity has FDI more than 51%. The local sourcing requirement can be met as an average during the first 5 years, and thereafter annually towards its India operations]
- 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 third party under a legally tenable agreement. [The extant Policy provides that incremental sourcing for global operations by non-resident entities undertaking SBRT, either directly or through their group companies, will also be counted towards local sourcing requirement for the first 5 years]. The present change was required since prevalent business models involve sourcing not only from by the entity or its group company, but also through an unrelated third party, at their behest.
- The entire sourcing from India for global operations shall now be considered towards local sourcing requirement and not just the incremental value. [Under the extant policy, only that part of the global sourcing is counted towards local sourcing requirement which is over and above the previous year’s value]. The amendment was made in view of the fact that the requirement of year-on-year incremental increase in exports induced aberrations in the system as companies with lower exports in a base year or any of the subsequent years could meet the current requirements, while a company with consistently high exports got unduly discriminated against.
- 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. This is expected to lead to creation of jobs in logistics, digital payments, customer care, training and product skilling. [The extant policy requires SBRT entities to operate through brick and mortar stores first before starting online sales of that brand.
SAM & Co comment
Given that the Local Sourcing Requirements applicable to SBRT entities have historically been a significant impediment in securing foreign investment in the SBRT sector, the relaxation of the Local Sourcing Requirements is a significant move, which may prove to be a game-changer for easing operations of SBRT Entities and for attracting increased foreign investment in this sector. Additionally, Indian manufacturers will also have to raise product quality and compete on price points with such foreign players or risk losing market share to them. However, the government has chosen not to completely do away with these requirements. This policy decision to preserve Indian manufacturing interests comes at a time when several multinationals are looking to move their manufacturing processes out of China, to avoid a swiftly escalating US-China trade war.
Moreover, removal of the restriction on undertaking electronic trading by a SBRT Entity without establishing brick and mortar stores can be expected to boost e-commerce activity in the country, and will allow Indian customers to access goods of international SBRT Entities, before such retailers actually establish their physical stores in the country. Increased e-commerce activity will also directly result in a larger number of digital payments and higher tax revenues for the government.
Additional conditionalities in relation to the approved amendments may be forthcoming in the corresponding amendments to the Extant FDI Policy and the FDI Regulations, as such, the impact of such conditionalities on the sector may need to be further evaluated.
Digital Media
The extant policy allows 49% FDI under approval route in Up-linking of ‘News & Current Affairs’ TV Channels only. It is now decided to permit 26% FDI under government route for uploading/ streaming of News and Current Affairs through Digital Media, in line with the print media
SAM & Co comment
Digital-only news platforms, which had no limitations on FDI so far, had been attracting a lot of interest from global private equity companies. There is no clarity on how this policy will apply to digital-only news platforms. A large number of them are start-ups. On one hand they were being encouraged by the government to grow through initiatives such as Start-Up India and Digital India and now their wings are clipped. It is important for the government to clarify whether news aggregators, news creators and news intermediaries would be put in the same category.
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