Consolidated FDI policy 2020- Major Updates

Varun Hariharan

03 Nov, 2020

The FDI policy in India indicates the decisive factors which allow foreign investment in India. Apart from this, foreign investors and entrepreneurs in India depend on this policy for their avenue of investment options. Over the years after liberalisation, India brought out the Foreign Exchange Management Act, 1999 (FEMA). FEMA deals with factors such as inbound investment, outbound investment, and compliance of laws with the Reserve Bank of India. With all the circulars issued by the RBI, the DPIIT has brought out consolidated FDI Policy in India from time to time.

The consolidated FDI policy of 2020 was brought out in October 2020. The waiting period for foreign investors and other entrepreneurs is over, as their doubts related to foreign investment would be answered through this policy update.

Different Consolidated FDI Policies brought out by the Indian Government

The DPIIT over the past five years has brought out different policies. These policies were brought out to understand the changes in the foreign investment carried out by foreign investors. Apart from this, digitisation and urbanisation have played a major role in amending FDI policy in India.

• Consolidated FDI Policy 2015– This was one of the first policies introduced by the DPIIT. This was a major eye-opener to understanding the routes for foreign direct investment in India.
• Consolidated FDI Policy 2016- A year after the 2015 policy was introduced, the 2016 policy came into force which brought out some changes in the sectors where foreign investment was permitted.
• Consolidated FDI Policy 2017- After the 2016 FDI policy this was brought out.
• Consolidated FDI Policy 2020- Three years after the 2017 consolidated FDI policy, the new policy updates were brought out.  Through this policy, all doubts of potential foreign investors will certainly be clear.

Why was the Consolidated FDI Policy of 2020 delayed?

There are many factors which led to the delay in the government to bring out this policy. Some of the factors were policy changes in the amendments carried out by the government.

However, the following factors led to the delay in bringing out this policy:

• Liberalisation of FDI- Due to thriving investment opportunities and external aggression, the government of India liberalised investment options available to foreign investors. Some of these steps included removing the requirement of government approval for investment in specific sectors.
• Change in Processes– Investments which required prior approval from the government in the past was changed to the automatic route. Under the automatic route, no prior approval is required from the government of India. An entity can bring in 100% foreign investment through the automatic route.
• Covid-19- The outbreak of the coronavirus pandemic has pushed the government to bring out policy changes in FDI. The government has taken a decisive stance during this period as the operations in India came to a standstill during the lockdown. Once the situation became normal, the government acted by bringing out the policy.
• Opportunistic Takeovers- This is one of the major reasons why the government delayed in bringing the consolidated FDI policy. A major blow to foreign acquisition was the Bank of China’s Acquisition of more than 1% of shares in HDFC. To avoid this, the government changed its policy related to foreign direct investment. As per the policy, any foreign investment that comes from a country that shares land borders with India would require to take prior approval from the Government. This revamped the entire system of FDI proposals from China. Seven countries were affected due to this policy change.
• Beneficial Ownership- The principle of beneficial ownership would depend on the amount of control by a company. The Government wanted any investment routed from China to have prior approval under the Government route. The beneficial ownership principle would depend on the amount of control which a company has. Here the citizenship aspect would also apply. Hence, if a Chinese citizen has control over a Mauritian company that wants to invest in India, then prior approval of the government would be required for this.  This move was to majorly reduce the amount of foreign investment from Chinese controlled companies.

Major Changes in FDI Policy 2020

Some of the changes would relate to the routes of proposed investment from foreign countries. This consolidated policy came out on 15 October 2020.

All the doubts related to investment would be answered through this consolidated policy.

The following are the changes in the FDI policy:

• Routes for Investment- When it comes to understanding the routes of foreign investment in India, then there are two routes: Automatic route and Government Route. Under the automatic route, no prior approval is required from the government of India. A foreign investor or a foreign entity can secure a 100% investment through the automatic route. Under the government route, prior approval is required from the requisite government authority.  There are no changes related to the route of foreign investment under the new policy.
• Entities for Investment- Under the old 2017 policy, any form of investment in capital instruments were permitted. Capital instruments would include equity shares, preference shares, compulsory convertible shares, and other forms of shares. The entities which were permitted foreign investment included private companies, unlisted companies, sole proprietorships, limited liability partnerships, and start-ups. Under the new policy, there is no change in the pattern or structure of investment in entities.
• Neighbouring Countries- The recent amendment which was introduced in April 2020 included restricting foreign investment under the automatic route from countries that share land borders with India. This was not present under the consolidated FDI policy of 2017. Countries that share land borders with India require prior approval from the government. Even the requirement of beneficial owner principle has been incorporated in the 2020 policy. Perhaps most of the doubts will be answered after this policy update.
• Changes in Past Three Years- Apart from the above, all the circulars and changes which occurred in the past three years have been incorporated in the FDI 2020 policy.
• Percentage of FDI increase- This policy iterated the amount of FDI infused in India in the three years after the 2017 policy. As per statistics, there has been a 16 % rise in the amount of FDI infused in India. This figure is as per the year-on-year rise of FDI in India. This year the amount of FDI has risen to USD 27 Billion. This figure is 4 billion more than the previous FDI received in India. In the previous year, the amount of FDI in India was recorded at USD 23 Billion.
• Apart from this, the amount of FDI received from reinvested earnings scaled to more than USD 35 billion in the country.
• In the previous financial year, the amount of reinvested earnings touched USD 31 Billion.
• Between the period of 2008 to 2014, the amount of FDI earned in India was more than USD 230 billion and between the period of 2014 to 2020 the amount of FDI earned in India touched more than USD 350 billion. From the amount of FDI percentage increase in the above, it can be understood that immense amount of foreign investment is coming in India.
• Scrutiny By Government- The government will scrutinise any investment coming from neighbouring countries. Hence foreign investment coming from these countries would require prior approval from the government of India. Any transfer relating to the beneficial ownership would also be affected as a result of this FDI. Previously, only Pakistan and Bangladesh were affected by this FDI policy changes. Now this will apply to seven neighbouring countries that share land borders with India.
• Segment Wise Changes- There has been an introduction of 26% cap in the area of digital news. This would also include digital media. Digital Media includes digital news (any form of media that is uploaded for streaming. Any form of current affairs would also be included under this sector). This FDI policy would bring the amount of investment in digital media on the same wavelength with published papers and print media. This would also include any form of foreign editions in Indian current affair papers. However, any form of investment in these sectors would require government approval. Hence digital media publications and print media both have a 26% FDI cap for foreign investment. Though this is a new addition when compared to the previous FDI policy, still government approval is sought for digital media sectors.
• E-Commerce Companies- Any e-commerce entity which receives foreign direct investment from another country has to maintain a statutory audit for every year. The requirement for statutory audit has to be submitted by 30 September.
• Apart from the above, any e-commerce entity which has some form of beneficial or equitable relationship with another e-commerce entity is not allowed to carry out any business.
• Any sellers or vendors cannot buy more than 25% of their inventory from the e-commerce platform. This would also apply to any form of associated company or sister company of the e-commerce entity.
• Product launches are banned as per the consolidated FDI policy of 2020.
• When it comes to amount of investment allowed in the e-commerce sector, then 100% foreign direct investment is allowed in this sector. This would apply to the market place model of the e-commerce sector. As per the guidelines, any information technology platform is used as a common place to connect the buyer and the seller. This will include all platforms where a business deals products.
• Any entity which receives FDI in the e-commerce sector can engage only in Business to Business (B2B) model.

Regulatory Authorities under FDI policy 2020

For any Foreign Direct Investment, consent is required from the respective regulatory authorities.

The below provides categories of sectors which require consent:

• Mining Sector- Ministry of Mines, Government of India.
• Defence Sector- Ministry of Defence and Department of Defence.
• Broadcasting Sector- Ministry of Broadcasting.
• Print media- Ministry of Broadcasting.
• Civil Aviation- Ministry of Aviation.
• Satellites and Space- Department of Space.
• Telecommunication Sector- Department of Telephonic and Telecommunications.
• Private Securities Agencies- MHA- Ministry of Home Affairs^[1].
• Any country that shares land borders with India- DPIIT and Government Approval. Apart from seeking separate ministry approval.
• Any security clearance related to Foreign Exchange Management (Non-Debt Instrument) Rules, 2019- For these Respective administrative ministries must be considered.
• Any Trading Activities- DPIIT.
• FDI from Non-Resident Indians and Export Oriented Units- Ministry Authorities and DPIIT.
• Issue of Equity Shares under the Government Route for any Import of Capital Goods- Ministerial Authorities and DPIIT.
• Pre-Incorporation Expenses FDI- Ministerial Authorities and DPIIT.
• Financial Services Activities- Finance Sector and Department of Economic Affairs.
• Foreign investment for CIC or any Indian company engaged in capital investment or other companies- Department of Economic Affairs.
• Banking- Department of Finance.
• Pharmaceuticals- Department of Pharmaceuticals.

The above sectors require prior consent from regulatory authorities under the consolidated FDI policy of 2020.

Conclusion- Consolidated FDI Policy 2020