Foreign Direct Policy (FDI) | Consolidated FDI Policy, 2020: Read the Key Aspects

Foreign Direct Investment (FDI) is considered as a major source of non-debt financial resource for economic development. FDI flows into India have grown consistently since liberalization and are an important component of foreign capital since FDI infuses long term sustainable capital in the economy and contributes towards technology transfer, development of strategic sectors, greater innovation, competition and employment creation amongst other benefits. Therefore, it is the intent and objective of the Government of India to attract and promote FDI in order to supplement domestic capital, technology and skills for accelerated economic growth and development. FDI, as distinguished from Foreign Portfolio Investment, has the connotation of establishing a ‘lasting interest’ in an enterprise that is resident in an economy other than that of the investor[1].

The Commerce and Industry Ministry, Government of India released the consolidated Foreign Direct Investment (FDI) policy 2020 on the 28th of October which is a single document containing all the decisions that have been taken by the Government with respect to FDI in the last three years. As per the Department for Promotion of Industry and Internal Trade (DPIIT), the policy has come into effect from October 15. The DPIIT has done away with press notes and has compiled all policies related to foreign investment into a single document thus making things easier and convenient for the investors.

In a bid to provide investor-friendly framework to foreign entities, the government has granted relaxations in a few sectors such as mining, single brand retailing, digital news, etc. In a big boost to an otherwise dull economy, this year India witnessed a 16 % increase in FDI on a year-to-year basis.

This policy supersedes all circulars/press notes/press releases issued by the DPIIT in the past. Dating back to earlier this year, certain restrictions were notified by the government applicable on FDI from overseas citizens or entities hailing from neighbouring countries that share a land border with India including China. These restrictions were placed in an attempt to prevent hostile and opportunistic takeovers of companies whose business might have suffered during the lockdowns imposed in light of the Covid19 pandemic. Now, these restrictions have found their way in the consolidated policy. The basic intent behind these restrictions is to ensure transparency when any investment flows from our neighbouring countries. These provisions are in no way intended to stop any and all probable investment from these countries but are a direct result of the government feeling the need for bringing certain amendments and making the legal framework more stringent and robust.

In a first of its kind in the country, an investment limit of 26 % has been introduced and imposed on FDI in digital media including the likes of web based content. This can be done only via the government approval route.

In a situation where the ownership of any existing or future FDI Investment in an entity in India is transferred directly or indirectly, leading to beneficial ownership then the same would invoke the restrictions stated under para 3.1.1(a) and any such change in ownership would require approval from the government’s end.

Key aspects of the Consolidated FDI Policy, 2020 are:

Investment from India’s neighbouring countries

Relevant portion from the policy is reproduced below-

An entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country – can invest only under the Government approval route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route.

No such investment is allowed from Pakistan in defence, space, atomic energy and sectors/activities that are prohibited for foreign investment.

In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, results in the beneficial ownership falling within the restriction/purview of the above – this will also require Government approval.

Investment cap on digital news media

A 26 % cap on FDI has been presented in the segment that covers digital news (transferring or streaming of news), which likewise requires government endorsement. This carries it at standard with the investment cap on newspaper and periodical distributions and the publication of Indian editions of foreign magazines covering news and current affairs, which are likewise dependent upon the government endorsement route.

Compliance in E-commerce sector

The most recent FDI policy expresses that it is compulsory for e commerce businesses with foreign investment to acquire and keep up a statutory audit report by September 30 consistently for the former financial year, which in turn would indicate their compliance with the country’s legal framework.

The 2020 FDI policy sets out all the recent changes that have been made in terms of e-commerce:

Disallowing an entity related by equity to the web based e-commerce business from doing business on the website portal;

Limiting merchants from purchasing in excess of 25 % of their stock from the platform and its group organizations; and

Exclusive product launches have been banned.

These norms have been in force since the past two years when they were implemented formally.

In this way, e-commerce business elements in India that recieve FDI can just take part in business to business (B2B) e-commerce and not in business to buyer (B2C) e-commerce.

Investment from Pakistan

The FDI norms remain unchanged for our controversial neighbours. A citizen or entity from Pakistan can invest through the government route in any sector with the exception of defence, space, atomic energy and sectors generally preventing foreign investment.

Read the policy here: FDI POLICY: FDI-PolicyCircular-2020-28October2020

[1] Consolidated FDI Policy, October 15 2020

Yashvardhan Shrivastav, Editorial Assistant has put this story together

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