FDI Regime – Press Note 5 of 2016

The Government of India (“Government”) has reviewed the foreign direct investment norms, and sectoral caps prescribed in relation to various sectors under the Consolidated FDI Policy Circular, 2016 dated June 7, 2015 (“FDI Policy”), and subsequently notified the Press Note 5 of 2016 dated 24th June 2016 (“Press Note 5”).

Press Note 5 eases entry level barriers and FDI norms in a number of sectors such including strategic sectors such as defence, pharmaceuticals, and aviation.

Defence

FDI in the Defence is permitted: (a) upto 49% under automatic route; and (b) above 49% through government approval (wherever it is likely to result in access to modern technology in the country, or for other reasons to be recorded). This FDI sectoral cap has also been made applicable to manufacturing of small arms and ammunitions covered under Arms Act 1959.

Pharma

In the pharmaceutical sector: (a) 100% FDI in Greenfield pharma vide the automatic route has been permitted; and (b) 74% is automatic and government approval is required beyond 74% in Brownfield pharma. Further, FDI up to 100% under the automatic route is permitted for manufacturing of medical devices.

Agriculture and Animal Husbandry

100% FDI is allowed under automatic route in: (a) Floriculture, Horticulture, and Cultivation of Vegetables and Mushrooms under controlled conditions (i.e., where the rainfall, temperature etc. is artificially controlled); (b) development and production of seeds and planting material; (c) Animal Husbandry, Pisciculture, Aquaculture, and Apiculture; and (d) services related to agro and allied sectors. FDI is not allowed in any other agricultural sector/activity.

Airports

In case of both existing and greenfield projects 100% FDI is permitted under automatic route. 

Air Transport

For Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and Regional Air Transport Services, up to 49% FDI is permitted under automatic route. Any FDI beyond 49% can be made subject to government approval. 

For Non Scheduled Air Transport 100% FDI will be allowed under automatic route.

However, there is no change in so far as investment that can be made by a foreign airline in case of Indian companies, operating scheduled and non-scheduled air transport services. Such foreign airlines (subject to other conditions as specified under the FDI Policy) are permitted to invest, up to the limit of 49% of their paid-up capital in the said Indian companies.

FDI upto 100% shall continue to be permitted in relation to ground handling services; and maintenance and repair organisations, flying training and technical institutions. 

Single Brand Retail

In case of single brand retailing 49% FDI is allowed through automatic route. Any FDI beyond 49% is allowed subject to government approval.

In case of investment beyond 51%, it is mandatory that 30% of the value of the goods will be sourced locally (i.e. from MSME’s, village and cottage industry, etc.). This local procurement requirement has to be met at the first instance as an average of five years’ total value of the goods purchased, and subsequently on an annual basis. However, an exemption for a period of three years (from the date of commencement of business) from this local sourcing requirement is granted to entities using ‘state of art’ and ‘cutting edge’ technologies.

Broadcasting

Teleports, Direct to Home (DTH), Cable Networks, Mobile TV and Headend-in-the Sky Broadcasting Service (HITS) have all been opened up to 100% FDI through the automatic route. 

For infusion of fresh foreign investment beyond 49% in a company not seeking license/permission from sectoral Ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, approval from the Foreign Investment Promotion Board (“FIPB”) will be needed. 

Private Security 

FDI up to 49% is now permitted under automatic route in this sector and FDI beyond 49% and up to 74% is permitted subject to government approval.

Branch office / Liaison Office 

Another significant change that has been introduced vide the Press Note 5 is that the establishment of branch office, liaison office or project office for certain industries has been made easier. It has been provided that in case of the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, and if an approval from FIPB or license/permission by the concerned Ministry/Regulator has already been granted then for the purposes of establishing a branch office, liaison office or project office or any other place of business in India no separate permission from the Reserve Bank of India or security clearance is required.

 

 

National Tariff Policy, 2016

Government of India has approved certain amendments to the National Tariff Policy on 20 January 2016 (“NTP, 2016”). The National Tariff Policy is formulated and notified in continuation of the National Electricity Policy (NEP) which in turn is notified under Section 3 of the Electricity Act, 2003. NTP, 2016 is primarily focused on renewable energy, (in particular solar energy) energy security and ensuring affordable tariffs.

Overview of Amendments

Some of the important highlights of the NTP, 2016 are as follows:

Access to Affordable Electricity

  • Subject to conditions, power generation plants have been allowed to increase their capacity by up to 100%.
  • Power is to be provided to remote unconnected villages through micro grids with provision for purchase of power into the grid as and when the grid reaches there.
  • Affordable power is to be made available for people near coalmines by enabling procurement of power from coal washery reject based plants.
  • In the event the power is supplied through expansion of power plants, the benefit of sharing in of infrastructure of existing project and efficiency of new technology is passed on to consumers through tariff. This would result in reducing the cost to consumers.
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It has also been provided that unless specifically exempted, inter-state transmission projects shall be developed through competitive bidding process.

Renewable Purchase Obligations (“RPO”)

The following amendments have been introduced in relation to RPO’s.

  • In order to promote renewable energy, NTP, 2016 provides that 8% of total consumption of electricity, excluding hydropower, shall be from solar energy by March 2022. As this is limited to solar energy, and therefore the actual impact and implementation of this amendment in relation to non-solar RPO needs to be analysed in the context of the Electricity Act, 2003, which requires that the RPO shall be calculated on the basis of total consumption. Further, the manner in which the DISCOMS calculate their respective RPO’s may also need to be reviewed as electricity sourced from hydro sources from RPO obligations is exempted.
  • RPO shall be applicable to cogeneration from sources other than renewable sources. This will provide impetus to RPOs.
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Renewable Generation Obligation (“RGO”)

It has been provided under NTP, 2016 that the renewable energy produced by each generator may be bundled with its thermal generation for the purpose of sale. Further, it has been provided that in the event an entity procures such renewable power, then the SERCs “…will consider the obligated entity to have met the Renewable Purchase Obligation (RPO) to the extent of power bought from such renewable energy generating stations
”. Thus, the clarification regarding RGO makes it convenient for thermal generators to meet RPO.

Waste to Energy

State Distribution Licensee shall “compulsorily procure 100% power” produced from all the Waste-to-Energy plants in the State. It is further provided that this procurement shall be done in the ratio of their procurement of power from all sources including their own, at the tariff determined by the Appropriate Commission under Section 62 of the Act. Therefore, under NTP, 2016 procurement of power from waste-to-energy plants has been made compulsory.

Inter- State Transmission Charges

As per NTP, 2016 shall be no interstate transmission charges applicable in relation to electricity generated from solar and wind sources of energy. This will encourage inter-state transaction of power.

Procurement of Power

In addition to the above, NTP, 2016 also provides that in order to keep the tariff low, the States shall endeavor to procure power from renewable energy sources through competitive bidding. This means that the preferential tariff regime for Renewable energy sources is shall no longer be applicable.

It also provides that only a maximum of 35% of installed capacity can be procured by the State based on the SERC determined tariff. This cap governs also forms of generation including renewable energy.

Bundled Renewable energy with conventional energy

The power from plants of a generating company, where either the PPAs have expired or plants have completed their useful life, may be bundled with power from renewable generating plants through the process of bidding or for which the equipment for setting up such plant is procured through competitive bidding.

Cross Subsidy

In relation to cross subsidies, NTP, 2016 provides that the cross subsidy shall be an aggregate of weighted average cost of power; transmission and distribution losses; transmission, distribution and wheeling charges and per unit cost of carrying regulatory assets, if applicable. This is a change from the earlier methodology of using the cost of marginal power. This has been an introduced for protecting the interest of both open access consumers as well as distribution companies (discoms). It has also been provided that the cross subsidy surcharge shall not exceed 20% of the applicable tariff to the category of consumer seeking open access.

However, NTP, 2016 recognizes that the amended cross subsidy methodology provided may not work for all distribution licensee, and therefore the SERC may review and vary the same, taking into consideration different circumstances prevailing in the area of relevant distribution licensee. Therefore, SERC has been provided wide discretion to determine the actual methodology applicable in case of cross subsidy.

Competitive Bid Structuring

NTP, 2016 also provides that in case there is any change in domestic duties, levies, cess and taxes imposed by Government, or by any Government instrumentality which impacts the cost of power then the same may be treated as “Change in Law” unless provided otherwise in the PPA and subject to the approval of the appropriate commission. This will allow the producers to pass through for impact of any change in domestic duties, levies, cess and taxes in competitive bid projects to the consumers.

Role of Regulators

The role of CERC/SERC in relation to several issues has been clarified under NTP, 2016  in the following manner:  

  • CERC should lay down guidelines for pricing intermittent power, especially from renewable energy sources, where such procurement is not through competitive bidding. The tariff stipulated by CERC shall act as a ceiling for that category.
  • SERC should similar to the CERC develop regulations for the inter-State transmission duly considering factors like voltage, distance, direction and quantum of flow, etc.
  • CERC shall regulate the tariff of generating company, if such generating company enters into or otherwise have a composite scheme for generation and sale of electricity in more than one State, i.e. where more than 10% power sold outside State.
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However, the NTP, 2016 provides that the CERC and SERC shall be guided by the tariff policy in discharging their functions including framing the regulations. There is no binding mandate under the NTP, 2016, which means that there is a wide leeway is available to the regulators in this regard.

Key Takeaways

The changes proposed in the policy can have positive impact on sectors such as renewable energy. However, as highlighted above the NTP, 2016 is a non-binding policy document. Therefore, the assessment of the impact of the changes will ultimately depend on the actual implementation of the said amendments by the various States.