Amendments in FDI Policy – January, 2018

Viineet V. Srivastav & Astha Srivastava

The following amendments have been introduced by Department of Industrial Policy and Promotion (DIPP) in the Foreign Direct Investment (FDI) regime on January 10, 2018:

100% FDI in single brand retail

The prevailing FDI policy allowed 49% FDI through the automatic route and beyond 49% and upto 100% through the Government approval route in single brand retail trade (SBRT) sector, the said limit has been increased to 100% through automatic route.

Single brand retailing entities would be allowed to begin incremental sourcing of goods from India for global operations during the first 5 years from the first day of the opening of the first store against the mandatory sourcing requirement of 30 percent purchases from India. After completion of the said 5 year period, the entities would be required to meet the mandatory sourcing requirement of 30 percent purchases from India.

A non-resident trading entity or entities, whether owner of the brand or otherwise, would be permitted to undertake SBRT in the country for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking SBRT and the brand owner.

Civil Aviation

Foreign airlines have been permitted to invest upto 49% in Air India under approval route, subject to the following conditions:

FDI in Air India including that of foreign airline(s) shall not exceed 49% either directly or indirectly

Substantial ownership and control of Air India would continue to vest in Indian Nationals.

Construction Development

It has been clarified that since real-estate broking service does not amount to real estate business, therefore the same would be eligible for 100% FDI through automatic route.

Power Exchanges

 While the existing FDI policy provided for 49% FDI through automatic route in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010, however, Foreign Portfolio Investors (FPI) / Foreign Institutional Investors (FII) purchases were restricted to the secondary market only. Accordingly, the Government has allowed FPIs/FIIs to invest in Power Exchanges in the primary market as well.

Other Approval Requirements under FDI Policy

Issue of shares against non-cash considerations like pre-incorporation expenses, import of machinery etc. would be permitted under automatic route in case of sectors under automatic route.

FDI in an Indian company engaged only in the activity of investing in other Indian companies or LLPs and in Core Investing Companies would be aligned with the FDI provisions in the “Other Financial Services” category. Accordingly, if the said investor companies in India are regulated by any financial sector regulator, then foreign investment upto 100% under automatic route would be allowed and if they are not regulated by any Financial Sector Regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100% would be allowed under approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government.

Competent Authority for examining FDI proposals from countries of concern

The competent authority for dealing with FDI proposals will be the Department of Industrial Policy and Promotion (DIPP) for investments in automatic route sectors requiring approval only on the matter of investment being from Countries of Concern. The competent authority would be concerned Administartine Department/ Ministry in the case of investments made in sectors requiring government approval and also requiring security clearance with respect to Countries of Concern.

 Pharmaceuticals

With respect to the Pharmaceuticals industry, it has been decided to change the definition of medical devices under the existing policy. Further, the existing policy provided that medical devices with respect to FDI policy would be defined with reference to the Drugs and Cosmetics Act and since the definition in the FDI policy is complete in itself, it has been decided to do away with this reference to the Drugs and Cosmetics Act.

Prohibition of restrictive conditions regarding audit firms:

In cases where the foreign investor specifies a particular auditor/ auditing firm having international network for the Indian investee company, then audit of such company would take place in the form of a joint audit in which one of the auditors should not be from the same network.

Update on Union Budget 2017-18

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A New Corporate Adjudicatory Forum – The National Company Law Tribunal

The Ministry of Corporate Affairs has constituted the National Company Law Tribunal (“NCLT”) vide notification S.O. 1935(E) with effect from 1st June 2016. 

As per the above referenced notification the NCLT shall be initially functioning with eleven Benches – two at New Delhi and one each at Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. The principal bench of NCLT shall be at New Delhi.

The NCLT is intended to provide a consolidated and single forum to adjudicate upon all corporate matters and disputes. The Company Law Board stands dissolved from the date of the from 1st June 2016, and all matters pending before the CLB shall stand transferred to NCLT.

In fact, subject to further notifications, once the NCLT is fully functional it shall also replace:

  • Board of Industrial and Financial Reconstruction; and
  • Appellate Authority for Industrial and Financial Reconstruction.

Further, the jurisdiction and powers relating to reduction of share capital winding up, restructuring, compromise or arrangement (merger/demerger), and other such provisions, currently vested in the High Courts shall also be conferred in favour of the NCLT. 

At present only certain provisions of the Companies Act, 2013 relating to powers of the NCLT have been notified, which include the power to:

  • entertain any claims of prejudicial or oppressive conduct of an enterprise and pass any order that may deem fit in such cases;
  • investigate into of the ownership of the company and pass any order against a Company incorporated by providing false information by fraud, misrepresentation or suppression of material fact;
  • grant approval for alteration of Articles of a Company (provided that such alteration should change its nature from public to private);
  • provide approval for issuance of redeemable preference shares by a Company;
  • call annual general meeting, meetings of members in specified cases;
  • remove the auditor suo moto or on application made by the Central Government;
  • remove directors in accordance with the provisions contained therein;
  • investigate into of the ownership of the company;
  • freeze the assets or impose restrictions on the securities held by a Company pending an inquiry and/or investigation; and
  • entertain a petition in the event a Company fails to redeem the debentures or pay interest on them.

In addition to the above, shareholders and creditors can now file class action suits against the company for breaching the provisions of the Act. In so far as enforcement is concerned, NCLT also may ask for assistance from the Chief Metropolitan Magistrate to enforce its decree against the company or persons connected with the order. An appeal at the first instance against the order of the NCLT shall lie before the National Company Law Appellate Tribunal, and a second appeal may be filed before the Supreme Court.

The Draft Insolvency and Bankruptcy Code, has also conferred NCLT with wide powers in relation to matters concerning revival and rehabilitation of sick companies, and liquidation process of companies. However, the said statute is yet to be notified and made effective.

The Government is notifying the provisions relating to NCLT in a phased manner. As highlighted earlier, a number of the Companies Act, 2013 provisions related to mergers, amalgamations and restructuring are yet to be notified.  In addition a number of rules and regulations will also need to be notified to make it completely operational.

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.

 

FDI in e-commerce

The Department of Industrial Policy and Promotions has issued Press Note 3 of 2016 dated March 29, 2016 under (“Press Note”). The Press Note is applicable on e-commerce entities incorporated in India.  This post provides a brief on the Press Note, along with certain issues that are perceived to arise in its context.

Definitional highlights

The Consolidated FDI Policy, 2015 (“FDI Policy”) refers to the activity of buying and selling through e-commerce platform in the context of FDI in retail trade. This definition appears to be geared towards covering “goods” within its ambit as opposed to “services”, primarily due to its references to retail trading.

In contradistinction to the FDI policy, the Press Note defines e-commerce as the business of buying and selling goods and services including digital products over digital and electronic network. The definition of “digital and electronic network” includes network of computers, television channels and other internet application used in automated manner such as web pages, extranets, mobiles, etc.

The Press Note, though, does not define the term “digital products”. Now, would one understand digital products to mean only goods, remains an open issue. This, however, is important because compliances under the FDI Policy and/or the Press Note would apply on the basis of classification of the offering as a “digital product”.

Paragraph 3 of the Press Notes provides that sale of services through e-commerce will be under automatic route but is silent on applicable compliance that are required to be met. Hence, a clarification from DIPP in relation to the classification of “digital products” may be warranted.

FDI in Marketplace Based Model of e-commerce

The Press Note allows 100 percent FDI in such e-commerce entities that facilitate sale and purchase of goods and services. Such transactions should occur between the buyer and the seller through an Online Platform. However, such entities are barred from maintaining inventory by way of ownership.

Distinction between Inventory-based model and Marketplace-based model

Section 2.1 of the Press Note defines certain critical terms and explains the difference between Inventory-based model and a Marketplace-based model as under:

  • Inventory-based model of e-commerce would mean an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly (what would be inventory of services appears to be an open issue)
  • Marketplace-based model of e-commerce would mean providing an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. In addition, the term Marketplace-based model also includes support services to sellers with respect to warehousing, logistics, order fulfilment, call center, payment collection and other services.

Therefore, as per the definition provided in the Press Note, a Marketplace-based model (think Amazon) means that the e-commerce entity would be providing a platform for customers to interact with select number of retailers. In such cases the product is actually sold by the seller to the customer. In contrast, the main feature of an Inventory-based model is that the customer is actually purchasing goods (and services!) from the e-commerce entity itself.

Permissible and Impermissible activities

From a definitional standpoint therefore, while maintenance of inventory is specified as an impermissible activity, support services, such as warehousing, logistics, order fulfilment, etc. have been specified to be permissible.

In addition to the above, the following activities have been disallowed to an e-commerce entity with FDI:

  • Influencing the sale price: Marketplace-based Entities have been prohibited from influencing the sale price of the goods and services offered on the Online Platform by the Sellers. This has ostensibly been done to put an obligation on the Marketplace Entities to maintain a level playing field. At a more granular level, this appears to disallow underwriting the minimum sales prices, offering discounts over and/or above what is offered by the sellers/retailers or offer ‘cash-back’ to sellers and/or absorbing losses. However, the Press Note does not specify a criteria for determining the sale price / the minimum sale price
  • Super Seller: The Press Note prohibits a single seller or its group companies from contributing to more than 25 percent of the sale of goods/services through an Online Platform.

The Press Note also provide for the seller liabilities. It has been provided that: (a) any warranty/guarantee of goods and services sold will be the responsibility of the seller; and (b) Post sales, delivery of goods to the customers and customer satisfaction will be the responsibility of the seller. Therefore, an e-commerce entity is absolved of any legal liability in relation to the goods and/or services provided to the customer and the seller bears the primary responsibility.

Compliance

Marketplace-based entities are required to list the name, address and contact details of the sellers.

In Conclusion

The Press Note leaves certain grey areas to be ironed out, such as the interpretation of “sale price” in the context of influencing of such prices by the e-commerce website.  In addition, it does not specify if those entities, which have already secured FDI would be covered within the ambit of the Press Note (though from an implementation perspective, it appears clear that such entities would be sought to be brought in within the ambit of the Press Note.  There are several structural and transactional changes that the e-commerce entities currently operating in the Indian space may have to introduce to their operations in India on account of the Press Note. Further, almost all start ups would need to pay close heed to the Press Note in designing their operations on a going forward basis. 

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.

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.

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.

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.

Impact of the WTO Panel Ruling on the Solar Mission of India

This post briefly discusses the WTO ruling in a case initiated by the United States against India in relation to domestic content requirements for solar cells and modules under certain specific phases of the Jawaharlal Nehru National Solar Mission (“Mission”) . 

I. WTO Ruling

United States had filed a panel request on 6th February 2013, against the domestic content requirements for solar cells and modules in Phase I (Batches I and II) of the Mission. On 10 February 2014, the United States requested supplementary consultations concerning certain measures of India relating to domestic content requirements under the Phase II (Batch I) of the Mission for solar cells and solar modules.

The main crux of the argument advanced by the United States was that the local content requirements mandated under the Mission applied different conditions to domestic cells and modules than the imported cells and modules to the detriment of the latter. Under the said Phases of the Mission, the Government was to enter into power purchase agreement with selected solar power developer’s contingent on their agreement to use domestically produced solar cells and modules. Therefore, United States argued that this requirement accorded less favorable treatment to the imported cells and modules than to the like modules and cells of Indian origin. Hence, India violated its national treatment obligations.

In its defence, India argued that the:

  1. solar cells and modules of Indian origin are integral part of solar electricity generation, which is procured by the Government (and not used for commercial resale) and therefore, derogation to national treatment obligations under Article III:8(a) is applicable
  2. local content requirement was covered under the exception of Article XX (j) of GATT 1994. India argued that it lacked domestic manufacturing capacity of solar cells and modules, and was dependent on imported cells and modules, which meant that the said products were in ‘general or local short supply’, and therefore the domestic content requirements were justified under Article XX (j) of GATT 1994; and
  3. local content requirement mandating use of doemstically producedcells and modules help in achieving India’s objective of sustainable development and ensuring energy security, and therefore, the said requirements are justified under under Article XX (d) of GATT 1994.

The panel (the report was circulated on February 24, 2016) agreed with the arguments advanced by the United States, and held that the domestic content requirements under the Phase I (Batches I and II) and Phase II (Batch I) of the Mission result in “less favourable treatment” to imported cells and modules within the meaning of Article III:4 of the GATT 1994.

The three-member panel rejected the arguments advanced by India distinguishing Appellate Body report in the case of Canada — Renewable Energy / Feed-In Tariff Programme . In particular the panel held that the product procured by the Government is electricity whereas the product discriminated against for reason of its origin is generation equipment,” i.e., solar cells and modules, and that as seen in case of Canada — Renewable Energy / Feed-In Tariff Programme neither solar cells nor solar modules are in a competitive relationship with electricity. Therefore, the derogation provided under Article III:8(a) is not applicable in the present case.

In so far as the defence under Article XX(d) is concerned, the panel held that it was insufficient that the local content requirement merely ensures the attainment of the objective of sustainable development/ clean energy but it is necessary that the said measures enforce specific sustainable development/ clean energy obligations which are contained in the legal instruments. Therefore, as India had failed to demonstrate that the local content requirements were directly enforcing the said obligations, Article XX(d) was not applicable.

II. Way Forward

The Government of India’s target of achieving 100 gigawatts (GW) of solar power by 2022 shall not be really affected by this ruling. In fact, as a result of this ruling (subject to the ruling of an appeal, if filed) both domestically manufactured solar cells and modules and imported solar cells and modules shall be available at competitive prices, which may help in generation of green energy at affordable and lower costs.

However, the domestic manufacturing capacity of solar cells and modules (even though the percentage of the domestic manufactures covered under the local content requirement is a small percentage of the total domestic manufacturing capacity of India) will be adversely affected as an aftermath of this ruling.

It is plausible that the Government can use the ‘Make in India’ programme to provide other forms of incentives and assistance to the domestic manufacturers to turn India into a manufacturing hub of solar cells and modules.

India may file an appeal against the panel ruling. Therefore, the final impact may need to be assessed again based on the final finding of the Appellate Body in the said dispute.

Start Up Action Plan – A New Beginning

An update on the Start Up Action Plan released by the Government of India, outlining various incentives and mechanisms for enabling the start up environment.