Over the years, India’s foreign direct investment (FDI) policies have been progressively liberalised by GoI. The point is to further India’s aim in establishing itself as an attractive investment destination. Despite the decline in FDI trends globally, India seems to be on the right track with the receipt of an all-time high FDI inflow of $64.4 billion in 2018-19.
With a view to further liberalise the extant FDI regime in India, on Wednesday, the Union Cabinet relaxed the limits on investment in the entities engaged in the business of coal mining, and contract manufacturing, while relaxing the local sourcing requirements for singlebrand retail trading (SBRT).
Current policy permits 100% FDI under the automatic route for two categories: (a) coal and lignite mining, limited only for captive consumption purposes by power generation projects, iron, coal washing units, and other eligible activities permitted under and subject to the Coal Mines (Nationalisation) Act, 1973; (b) setting up of coal-processing plants subject to the condition that the company shall not conduct coal mining and shall not sell washed/sized coal from its coal processing plants in the open market, and shall supply the washed/sized coal to those parties who are supplying raw coal to processing plants for washing/sizing.
Wednesday’s announced reform permits 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.
This change seeks to open up the coal mining sector to foreign investment beyond just captive use allowed under the earlier dispensation. Large global corporations such as BHP and Peabody Energy can benefit from GoI’s move to fully open up the coal mining sector in India to foreign players.
Under the existing FDI regime, 100% FDI is allowed under the automatic route for the manufacturing sector, where a manufacturer is permitted to sell its products manufactured in India through wholesale or retail, including through ecommerce. However, considering the lack of clarity on outsourcing of manufacturing activities — that is, contract manufacturing — a provision for contract manufacturing has been introduced.
With a view to further stimulate domestic manufacturing as part of ‘Make in India’ initiative, 100% FDI under automatic route has been allowed in contract manufacturing, to bring it on par with the existing FDI regime. Hence, manufacturing activities now may be conducted by the investee entities themselves, or through contract manufacturing under a lawful contract, either on principal-to-principal or principalto-agent basis.
Under the extant FDI regime, 100% FDI is permitted — that is, up to 49% under the automatic route and beyond that under the approval route. There is an additional requirement of procuring 30% of the value of goods from India as part of the local sourcing norms, where an SBRT entity has FDI of 51% or more.
In order to provide greater flexibility, and considering the likes of Apple, Ikea and Uniqlo, the local sourcing requirements have been relaxed to the extent that all procurements made in India — including both where goods are sold in India and exported — by the SBRT entity for the particular brand will be counted towards local sourcing.
To open the FDI doors further, GoI has now decided that retail trading through online trade can be undertaken prior to the opening of brickand-mortar stores, provided that such an SBRT entity will open its physical stores within two years from the starting date of their online retail business. This reform aims at creating employment opportunities in logistics, digital payments, customer care and training.
The Narendra Modi government has continued its effort in liberalising the FDI regime. With a global economic slowdown anticipated in the months to come, these timely measures should prove to be effective and is likely to reinforce the confidence in investors towards the GoI’s commitment to attract more FDI while improving ease of doing business.
Shroff and Shah are managing partner and partner, respectively, at Cyril Amarchand Mangaldas. Inputs by Aviral Chauhan, senior associate with the firm.