Global Tax Alert | 19 July 2013

India proposes amendments to its foreign direct investment policy

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Executive summary

On 16 July 2013 via press release, the Indian Government released proposed amendments to the country’s Foreign Direct Investment (FDI) policy. These proposed amendments must be approved by the Cabinet and published through the press notes issued by the Ministry of Commerce and Industry to form a part of the FDI policy.

The decisions were taken in a meeting chaired by the Prime Minster, on the basis of the recommendations of the Mayaram Committee.1 The sectors for which the revised policy is proposed include petroleum and natural gas refining, commodity exchanges, power exchanges, stock exchanges, credit information companies, single brand retail trading, courier services, asset reconstruction companies, defense and telecom.

Background

To meet the challenging economic scenario of a depreciating rupee and declining foreign investment, the Government has announced reforms in the FDI policy by listing out proposed relaxation in various sectors including telecom, defense, single brand retail trading and credit information companies. The proposed changes are in line with the recommendations made by the Committee chaired by Mr. Arvind Mayaram, Secretary, Department of Economic Affairs, Ministry of Finance.

With these policy reforms, the Indian Government intends to increase flow of foreign investment and strengthen the confidence of foreign investors in India.

Under the present FDI policy, a majority of the sectors are under the automatic approval route and with these amendments, the list of sectors where approval is required has been further reduced. The Government has made an effort to remove the investment blockage by converting the Government approval route to an automatic route in non sensitive sectors and in the sensitive sectors the limits have been enhanced through the approval route.

FDI proposed amendments

Sector

Existing Sectoral Cap & Route

Revised Sectoral Cap & Route

Petroleum & Natural Gas (Refining)

49% – Approval Route

49% – Automatic Route

Commodity Exchanges

49% (FDI + FII) - Approval Route

49% (FDI + FII) – Automatic Route

Power Exchanges

49% (FDI + FII) - Approval Route

49% (FDI + FII) – Automatic Route

Asset Reconstruction Company

74% of paid-up capital of ARC
(FDI+FII) - (Approval Route)

100% of paid-up capital of ARC (FDI+FII)
Up to 49% – Automatic Route
Beyond 49% – Approval Route

Credit Information Companies

49% (FDI + FII) – Approval Route

74 % (FDI + FII) -– Automatic Route

Stock Exchanges and Clearing corporations

49% (FDI + FII) – Approval Route

49% (FDI + FII) – Automatic Route

Telecom
(Basic and Cellular Services)

74% – Approval Route

100%; Up to 49% – Automatic Route Beyond 49% – Approval Route

Single Brand Retail Trading

100% – Approval Route

100%; Up to 49% – Automatic Route Beyond 49% – Approval Route

Courier Services

100% – Approval Route

100% – Automatic Route

Defense
[Foreign Investment in State of the Art Technology Manufacturing]

26% – Approval Route

Cabinet Committee on Security may approve proposals on case to case basis beyond 26% which are likely to result in access to modern and state of the art technology in the country.

Impact

The above revisions are a positive step and they should be effective in increasing the foreign inflow and growth of India. The amendments shall be effective from date of issuance of formal Press Notes by the Department of Industrial Policy and Promotion (DIPP). These policy changes were essential to augment confidence of the foreign investor. The recommendation of the Mayaram Committee on various other issues including broadcasting, print media, pharma, etc. are still under consideration and revisions pertaining to the investment mechanism in these sectors may be revised in the near future.

Endnote

1. A committee constituted by the Government and headed by Economic Affairs Secretary Arvind Mayaram was set up to evaluate the existing FDI policy.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India), Mumbai
  • Sudhir Kapadia
    +91 22 6192 0900
    sudhir.kapadia@in.ey.com
  • Hitesh Sharma
    +91 22 6192 0620
    hitesh.sharma@in.ey.com
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
  • Nachiket Deo
    +020 778 30862
    ndeo@uk.ey.com
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
  • Gagan Malik
    +65 6309 8524
    gagan.malik@sg.ey.com
Ernst & Young LLP, Indian Tax Desk, New York
  • Tejas Mody
    +1 212 773 4496
    tejas.mody@ey.com

EYG no. CM3665