FDI Policy consolidated after 3 years: mismatches with NDI Rules remain

FEMA (Non-Debt Instruments) Rules, 2019 requires to be aligned for few sectors.

Bunny Sehgal | Associate | Vinod Kothari and Company

corplaw@vinodkothari.com

Introduction

The Department for Promotion of Industry and Internal Trade (‘DPIIT’) issued the Consolidated FDI Policy, 2020 (‘FDI Policy, 2020’) on October 28, 2020[1] in supersession of all press notes/ press release/ clarifications/ circulars issued by DPIIT. The FDI Policy, 2020, issued after 3 years[2], is effective from October 15, 2020. In case of any inconsistency or conflict between the provisions of FDI Policy 2020 and FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’), the relevant provisions of the NDI Rules will prevail.

FDI Policy is generally a compilation/ consolidation of all press notes/ press releases/ clarifications/ circulars issued by the DPIIT. The author has compared the FDI Policy, 2020 with the erstwhile policy, NDI Rules, and press notes issued by DPIIT in order to ascertain if there is any new insertion in the FDI Policy, 2020 or if the provisions deviate from NDI Rules and discussed the changes in this article.

1.   Definition of E-commerce entity

Under the NDI Rules, E-commerce entity means a company incorporated under Companies Act 1956, or the Companies Act, 2013.

However, under the FDI Policy, 2020, an E-commerce entity means the following:

  1. a company incorporated under Companies Act 1956, or the Companies Act, 2013;or
  2. foreign company under section 2 (42) of the Companies Act, 2013; or
  3. an office, branch or agency in India as provided in section 2 (v) (iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.

The FDI Policy, 2020 elaborates the definition further to include foreign company and office, branch or agency in India owned or controlled by a person resident outside India. The changes have been brought in line with the definition of E-commerce entity provided in the Press Note 2 of 2018[3] issued by Department of Industrial Policy and Promotion effective from February 01, 2019.

2.     FDI in Defence Sector

The provisions of the NDI Rules and the FDI Policy, 2020 with regard to the FDI sectoral cap and the necessary approvals for FDI in Defence Sector, have been provided as follows:

Sr. No. NDI Rules FDI Policy, 2020
1. Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act, 1951 and Manufacturing of small arms and ammunition under the Arms Act, 1959
Sectoral Cap- 100%

  • Automatic route– Upto 49%;
  • Government approval– Beyond 49%, wherever it is likely to result in access to modern technology or for other reasons to be recorded.
Sectoral Cap- 100%

  •  Automatic route– Upto 74%;
  • Government approval– Beyond 74%, wherever it is likely to result in access to modern technology or for other reasons to be recorded.
Other Conditions ( Relevant extract)
2.
  •  Fresh foreign investment within the permitted automatic route, in a company not seeking industrial license, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, shall require Government approval.
  •  FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses.
  • Infusion of fresh foreign investment up to 49%, in a company not seeking industrial license, or which already has Government approval for FDI in Defence, shall require mandatory submission of a declaration with the Ministry of Defence in case change in equity /shareholding pattern or transfer of stake by existing investor to new foreign investor for FDI up to 49%, within 30 days of such change.

The limits provided in the FDI Policy, 2020 and other conditions were proposed vide press note 4 of 2020[4], and it will take effect from the date of FEMA notification. The FEMA notification in this regard is awaited, therefore, the amendment is not effective as on date.

3.     FDI in Private Security Agencies

The provisions of the NDI Rules and the FDI Policy, 2020 with regard to the FDI sectoral cap and the necessary approvals for FDI in Private Security Agencies, have been provided as follows:

Sr. No. NDI Rules FDI Policy, 2020
1. Sectoral Cap- Upto 49% through Government approval only. Sectoral Cap-  Upto 74%

  • Upto 49%- Automatic route;
  • Beyond 49% and upto 74%- Government approval

The sectoral cap for FDI in Private Security Agencies was revised as per the aforesaid limits vide Press Note 5 of 2016[5] dated June 24, 2016 effective on immediate basis. However, the NDI Rules continue to refer to old limits. The same is required to be aligned with FDI Policy, 2020

4.     FDI in Asset Reconstruction Companies

The FDI Policy, 2020 provides following additional conditions for making foreign investment in Asset Reconstruction Companies (ARCs) as prescribed in Press Note 4 of 2016[6] dated May 6, 2016 effective on immediate basis:

  1. A person resident outside India can invest in the capital of ARCs registered with Reserve Bank of India, up to 100% on the automatic route.
  2. The total shareholding of an individual FPI shall be below 10% of the total paid-up capital.

However, the NDI Rules do not provide for the aforesaid conditions in this regard. While (i) above is self-explanatory and that express provision will not make much difference, the condition given in (ii) is crucial.

Conclusion

The intent and objective of the Government of India is to attract and promote FDI in order to supplement domestic capital, technology and skills for accelerated economic growth and development. With the enforcement of FDI Policy, 2020, some gaps have been observed in the provisions of NDI Rules and FDI Policy, 2020 which have been left over either inadvertently, or due to pending notification of the same. Although, the FDI Policy, 2020 itself provides for the superiority of the NDI Rules in case of any conflict between the provisions of the FDI Policy, 2020, and the NDI Rules, it is imperative for the authorities to look into to bring the uniformity in the provisions.

 

 

 

[1] https://dipp.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf

[2] The former Consolidated FDI Policy was issued in 2017.

[3] https://dipp.gov.in/sites/default/files/pn2_2018.pdf

[4] https://dipp.gov.in/sites/default/files/pn4-2020_0.PDF

[5] https://dipp.gov.in/sites/default/files/pn5_2016.pdf

[6] https://dipp.gov.in/sites/default/files/pn4_2016.pdf

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