The Union Cabinet, chaired by the Prime Minister Shri
Narendra Modi, has given its approval to review the existing
FDI policy on various sectors provided in the Consolidated FDI Policy Circular
2014, as amended by the Consolidated FDI Policy Circular 2015, by introducing
composite caps for simplification of Foreign Direct Investment (FDI) policy to
attract foreign investments. Following amendments to
the relevant paragraphs of Consolidated FDI policy were approved:
(a) Para 3.1.4 (i): An FII/FPI/QFI (Schedule 2, 2A and 8 of FEMA (Transfer or Issue of
Security by Persons Resident Outside India) Regulations, as the case may be)
may invest in the capital of an Indian company under the Portfolio Investment
Scheme which limits the individual holding of an FII/FPI/QFI below 10 percent
of the capital of the company and the aggregate limit for FII/FPI/QFI
investment to 24 percent of the capital of the company. This aggregate limit of
24 percent can be increased to the sectoral cap/statutory ceiling, as
applicable, by the Indian company concerned through a resolution by its Board
of Directors followed by a special resolution to that effect by its General
Body and subject to prior intimation to RBI. The aggregate FII/FPI/QFI
investment, individually or in conjunction with other kinds of foreign
investment will not exceed sectoral/statutory cap.
(b) Para 3.6.2 (vi): It is also clarified that Foreign
investment shall include all types of foreign investments, direct and indirect,
regardless of whether the said investments have been made under Schedule 1
(FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 8 (QFI), 9 (LLPs) and 10 (DRs) of
FEMA (Transfer or Issue of Security by Persons Resident Outside India)
Regulations. FCCBs and DRs having underlying of instruments which can be issued
under Schedule 5, being in the nature of debt, shall not be treated as foreign
investment. However, any equity holding by a person resident outside India
resulting from conversion of any debt instrument under any arrangement shall be
reckoned as foreign investment.
(c) Para 4.1.2: For the purpose of computation of indirect
foreign investment, foreign investment in an Indian company shall include all
types of foreign investments regardless of whether the said investments have
been made under Schedule 1 (FDI), 2 (FII holding as on March 31), 2A (FPI
holding as on March 31), 3 (NRI), 6 (FVCI), 8 (QFI holding as on March 31), 9
(LLPs) and 10 (DRs) of FEMA (Transfer or Issue of Security by Persons Resident
Outside India) Regulations. FCCBs and DRs having underlying of instruments which
can be issued under Schedule 5, being in the nature of debt, shall not be
treated as foreign investment. However, any equity holding by a person resident
outside India resulting from conversion of any debt instrument under any
arrangement shall be reckoned as foreign investment.
(d) Para 6.2:
(i) In the sectors/activities mentioned in this
paragraph, foreign investment up to the limit indicated against each
sector/activity is allowed, subject to the conditions of the extant policy on
specified sectors and applicable laws/regulations; security and other
conditionalities. In sectors/activities not listed therein, foreign investment
is permitted up to 100 percent on the automatic route, subject to applicable
laws/regulations; security and other conditionalities.
Wherever there is a requirement of minimum
capitalization, it shall include share premium received along with the face
value of the share, only when it is received by the company upon issue of the
shares to the non-resident investor. Amount paid by the transferee during
post-issue transfer of shares beyond the issue price of the share, cannot be
taken into account while calculating minimum capitalization requirement.
(ii) Sectoral cap that is to say the maximum amount
which can be invested by foreign investor, unless provided otherwise, is
composite and includes all types of foreign investments, direct and indirect,
regardless of whether the said investments have been made under Schedule 1
(FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 8 (QFI), 9 (LLPs) and 10 (DRs) of
FEMA (Transfer or Issue of Security by Persons Resident Outside India)
Regulations. FCCBs and DRs having underlying of instruments which can be issued
under Schedule 5, being in the nature of debt, shall not be treated as foreign
investment. However, any equity holding by a person resident outside India
resulting from conversion of any debt instrument under any arrangement shall be
reckoned as foreign investment under the composite cap.
(iii) Foreign investment in sectors under Government
approval route resulting in transfer of ownership and/or control of Indian
entities from resident Indian citizens to non-resident entities will be subject
to Government approval. Foreign investment in sectors under automatic route but
with conditionalities, resulting in transfer of ownership and/or control of
Indian entities from resident Indian citizens to non-resident entities, will be
subject to compliance of such conditionalities.
(iv) The sectors which are already under 100 percent
automatic route and are without conditionalities would not be affected.
(v) Notwithstanding anything contained in paragraphs
(i) and (iii) above portfolio investment, upto aggregate foreign investment
level of 49 percent, will not be subject to either government approval or
compliance of sectoral conditions, as the case may be, if such investment does
not result in transfer of ownership and/or control of Indian entities from
resident Indian citizens to non-resident entities,
(vi) Total foreign investment, direct and indirect, in
an entity will not exceed the sectoral/statutory cap.
(vii) Any existing foreign investment already made in
accordance with the policy in existence would not require any modification to
conform to these amendments.
(viii) The onus of compliance of above provisions will be on the
investee company.
Background:
In the last fourteen months, the Government has taken
a number of reform measures ranging from policy corrections to bold economic
reforms. On FDI policy, measures taken by the Government are historic and far
reaching. To begin with, the Government first reviewed the FDI policy in
defence and railways sectors. Entire range of rail infrastructure was opened to
100 percent FDI under automatic route, and in defence, sectoral cap was raised
to 49 percent. To boost infrastructure creation and to bring pragmatism in the
policy, the Government reviewed FDI policy in construction development sector
also by creating easy exit norms, rationalizing area restrictions and providing
due emphasis to affordable housing. To give impetus to medical devices sector,
a carve out was created in FDI policy on pharmaceutical sector and now 100
percent FDI under automatic route is permitted. Bold reforms were needed in the
services sector also. The Government, in order to expand insurance cover to its
large population and to provide required capital to insurance companies, raised
the FDI limit in the sector to 49 percent. Pension sector has also been opened
to foreign direct investment up to the same limit. Further, FDI policy has now
been amended to provide that NRI investment on non-repatriation basis will be
treated on par with domestic investments.
India
has a large available skilled and unskilled workforce. However unless the
manufacturing sector grows we will not be able to take advantage of this
demographic dividend. The Prime Minister launched ‘Make in India’ on 25 September 2014 to provide boost to manufacturing
sector in the country. Subsequently, Government embarked upon a number of
initiatives on ease of doing business. A number of regulations and procedures
were either done away with or eased. Foreign investors have now shown
unprecedented interest for investment in the manufacturing sector. Measures
taken on this front have shown highly encouraging results and foreign
investment on a series of manufacturing sectors has shown increased growth from
October onwards. See the chart below:

Above
are some of the main measures which have been taken by the government in the
first fourteen months of its term. These measures are historic and will have
highly positive impact on the economy. Though gestation period of any reform
ranges from 12 to 18 months, the results of these reforms are visible even in a
short period of time. Foreign direct investment has shown substantial increase
across the sectors. During the period October, 2014 to April, 2015, FDI inflow
recorded a growth of 42 percent from US $ 20.75 billion in US $ 29.42 billion.
FDI equity inflows also increased from US $ 13.41 billion to US $ 19.84
billion, recording an increase of 48 percent. See the chart below:

Cardinal principle of the FDI policy of the country has been to
keep maximum of the sectors under automatic rule and regulating only those
sectors which are strategic in nature or have security concerns. It is not
surprising that more than 90 percent of the FDI received in the country comes
under automatic route. However the last year saw significant jump in the
approval route though no new sector was placed under the government approval.
In fact more sectors were liberalised during this period. As against US$ 1.19
billion received under the approval route in financial year 2013-14, during the
financial year 2014-15 recorded FDI inflow of US $ 2.22 billion with a growth
of 87 percent. This is a result of fast pace of approvals being accorded by the
government and confidence of investors in the foreign investment climate of the
country. See chart below:

The government endeavours to put in highly liberalised FDI policy
which is not only friendly to foreign investors but also addresses the concerns
of domestic constituency by increased manufacturing, job creation and overall
economic growth. Further, the Indian companies should have choice between
different categories of foreign investments. The Finance Minister has already
announced in his budget speech that ‘to further simplify the procedures for
Indian Companies to attract foreign investments, I propose to do away with the
distinction between different types of foreign investments, especially between
foreign portfolio investments and foreign direct investments, and replace them
with composite caps. The sectors which are already on a 100 percent automatic
route would not be affected.’
In
view of the above announcement of the Finance Minister, necessary changes were
required in the FDI policy of the country. The Cabinet
in its meeting held today, approved the proposal of Department of Industrial
Policy & Promotion to review the extant FDI policy on various sectors
provided in the Consolidated FDI Policy Circular 2014, as amended by
Consolidated FDI Policy Circular 2015, by introducing composite caps so that
uniformity and simplicity are brought in across the sectors in FDI policy for
attracting foreign investments.
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NW/AKT/SH