With current account deficit and inflation bogging the economy down in early April 2013, Dr. Manmohan Singh, while addressing the Confederation of Indian Industries AGM, termed the 5 percent GDP expansion as clearly disappointing, and made a case for speedy and decisive actions to achieve 8 percent economic growth. This story, takes a look at the policy level changes which the Govt. has introduced since that speech of Dr. Singh.
In an attempt make it easier for the foreign direct investors, The Department of Industrial Policy and Promotion (DIPP) with immediate effect, has changed the definition of a ‘Group Company’, Now a ‘Group Company’ means “two or more enterprises, which directly or indirectly are in a position to exercise 26 per cent or more voting rights in the other enterprise, and can appoint more than 50 per cent of members of the board of directors in the other enterprise,”. The change has its background in a DIPP made rule. As FDI was not permitted in the multi-brand retail in 2010, DIPP, in an attempt to prevent foreign firms from indirectly selling in domestic multi-brand retail outlets, had restricted cash-and-carry companies from selling more than 25 per cent goods to ‘group companies’ then. It required that the trade should not exceed 25 per cent of the total turnover of the wholesale venture and the wholesale made to the group firms should be for their internal use only. Besides by virtue of this redefinition Indian-owned but foreign-controlled companies would be allowed to make investments in sectors that have caps on FDI. Currently, this is not allowed. For instance, if ICICI Bank, which has 77 per cent foreign ownership, decides to invest in the telecom sector, the 74 per cent FDI limit in the sector would be applicable.
Though not much appreciated by many yet DIPP sticking to its guns came out with its clarifications on the queries of prospective Multi-brand retail trade (MBRT) investors.
30% sourcing from small and medium enterprises
Query: Can the Foreign Investor purchase the 30% of the total procurement of manufactured or processed goods by the SME but distribute them either through the retail operation and/ or cash & carry operations and/ or export for the Foreign Investor’s International retail & trading operations?
Response: No. The 30% sourcing will be reckoned only with reference to the front end store. As such a multi-brand retailing entity cannot engage in any other form of distribution.
Query: Whether a ‘small industry’ referred to the actual legal entity of manufactured/processed products purchased with investment within USD 1 million which shall not include its parent company, subsidiaries, affiliates and/or franchisor? Whether farmer, cooperative, agro-business including dairy, poultry and fresh, distributor and reseller of major branded companies will be counted as a SME if its investment is within USD 1 million?
Response: The phrase used in the FDI policy is ‘small industries’ with maximum investment in Plant & Machinery at USD 1 million. The sourcing condition pertains only to manufactured and processed products. Procurement of fresh produce is not covered by this condition. 50% investment in back-end infrastructure
Query: Can the new retail entity to be set up acquire supply chain/back-end assets or stake from an existing company having such assets and will such assets /stake values be counted towards the back-end investment requirement?
Response: No. Entire investment in backend infrastructure has to be an additionality. The entity can invest only in greenfield assets and it will not be possible to acquire supply/chain/backend assets or stakes from an existing entity
Query: Would investment (equity stake less than 100%) in a company engaged in development of back-end infrastructure be considered part of the investment in backend infrastructure if one can certify its use towards back-end capacity?
Response: No. Such investment in the equity of the existing infrastructure company will not be treated towards the fulfillment of the conditionality of 50% investment in back-end infrastructure.
Query: Whether investment in back-end infrastructure for instance for storage, warehouses, agricultural produce infrastructure in non-FDI approved states will be counted towards investment in back-end infrastructure.
Response: FDI in these activities is already allowed throughout the country. As far as MBRT is concerned FDI in non-FDI approved States in backend infrastructure will be counted provided it is an additionality.
Query: Will the new retail entity include back-end facilities that have the capacity to supply its own businesses and other businesses. It should be free to supply back-end services (e.g. logistic supply, goods) to related or third party companies, including but not limited to the company’s existing wholesale entity and the retail franchisee operated by its partners.
Response: As per the conditions for wholesale cash & carry trading, such an entity is not permitted to undertake retailing of any form. Therefore, both the businesses have to be kept separate through different entities. As regards supplies by MBRT company to franchisees run by its partners, it is clarified that the policy envisages multi-brand trading in retail. The MBRT entity is not envisaged to undertake wholesale activity i.e. B2B. The front-end stores set up by MBRT entity will have to be ‘company owned and company operated’ only.
Query: Would a company operating in wholesale trading/ cash & carry trading be considered as a company providing backend infrastructure in efficiently distributing the goods to the small retailers and professional/ business users?
Response: No. The wholesale trading/ cash & carry trading cannot be considered to be providing back-end infrastructure. FDI in MBRT will require fresh investment in back-end infrastructure.
Query: Would the minimum investment of 50% of the total FDI in back-end infrastructure be mandatorily invested in the same state where the retail store is proposed to be set up?
Response: The investment towards backend infrastructure can be made across all states irrespective of the fact whether FDI in MBRT is allowed in that state or not.
Query: If the same foreign investor is an investor in various companies for logistics, services etc., will the backend investment made by such investor be aggregated?
Response: No. Investments in multiple infrastructure companies would not be counted towards fulfilment of condition of investing 50% in the back end infrastructure.
Query: Can back-end and front-end infrastructure be held by separate entities? Can the back-end entity be 100% owned by a foreign entity since 100% FDI is permitted under the automatic route for a company engaged in back-end infrastructure related?
Response: The back-end entity may be 100% owned by a foreign entity as long as the investor in MBRT has been able to satisfy the condition that 50% of the FDI brought into the country for MBRT has been utilized in back-end infrastructure as an additionality.
Query: Suppliers should have some form of authentication to confirm their status as ‘small industry’.
Response: Certificate issued by District Industries Centre would be adequate authentication to confirm status of supplier as ‘small industry’.
Query: For determining whether a city has a population of more than 10 lakh, it should not be limited to the data as per the 2011 census. When a city reaches such population level after 2011, it should be allowed to selfcertify that it has achieved the population. Further, the population restriction should recognize that twin cities or co-located cities may be eligible based on their combined population.
Response: Census data is the most authoritative source of population data, which is accepted by all the States. Therefore, no other data source or self certification can be permissible.
The policy should not give states that have approved FDI in multi brand retail the ability to change the fundamental rules of the FDI policy including but not limited to the 30% ‘small industry’ sourcing and minimum investment in back-end infrastructure requirements.
States which have opted for inclusion in the FDI policy have already been notified. Any amendment in the policy falls under the domain of the Central Government. However, State laws/ regulations will apply.
Query: In case, the foreign investor approaches a State Government for setting up a retail store, can the state Government put additional conditions to operate in that state?
Response: FDI policy in MBRT is subject to the applicable State/Union Territory laws/ regulations. The State Governments have the prerogative of imposing additional conditions accordingly.
Query: In case, the foreign investor approaches a State Government not included in the list of states supporting FDI in MBRT, would the approval of such new state be valid before they are notified to the DIPP for addition in the list?
Response: If the foreign investor approaches a State Government not included in the list of states supporting FDI in MBRT, consent from the State Government would be sufficient, and a suitable amendment to the policy will be issued by the Central Government. Policy on e-commerce
Query: Allowing online sales will enable the Company to better serve Indian customers through enhanced convenience and assortment as well as improve the site customer experience. This will allow the company to make significant investments in Logistics.
Response: Multi-brand retail trading by way of e-commerce is not permitted.
Query: Whether the back-end infrastructure could support front end retail franchise stores in non-FDI states at arm’s length price.
Response: Back end infrastructure, so developed, can be used across the states by any entity. Franchisee model is not permissible as per extant FDI policy on MBRT. The front-end stores set up by MBRT entity will have to be ‘company owned and company operated’ only
Query: Can the minimum investment of US$ 100 Million be used to acquire existing retail stores or setting up new retail stores or a combination of both?
Response: 50% of the investments brought in, must be invested in back-end infrastructure, and any amount spent in acquiring front end retail stores would not be counted towards back-end infrastructure. The front-end retail stores must also be set up as an additionality and not through acquisition of existing stores.
The Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments headed by Mr. K. M. Chandrasekhar, former Cabinet Secretary, Govt. of India, which was formed to prepare draft guidelines, based on the guidance of the Working Group on Foreign Investment in India (WGFI) in mid June had submitted its recommendations to SEBI.
Unless full report is seen it will be unwise to comment on the full impact of the recommendations. Yet it can be said that at the time when India needs foreign investment desperately to tide over its macroeconomic difficulties the recommendations are a welcome step. With fusing of categories of foreign investors into one broad category i.e. FPIs and continuing with useful categories of NRIs and FPIs it’s a much convenient classification of the foreign investors that is not only simple but would also save time for them. Doing away with registration requirement is also a welcome step as it makes it even more easier and simpler for the investors. And risk based classification of FPIs into three categories is also a big relief for the investors. All in all it can be said that it’s a welcome development.
As was evident from the speech of Dr. Singh at CII in April 2013, liberalisation of foreign direct investment in the economy as part of the measures to encourage flow of foreign capital in to the economy, Now Companies planning to apply for bank licences will be allowed 100 per cent foreign direct investment (FDI) in their holding companies. The downstream banks can have 74 per cent foreign investment of which 49 per cent will be direct.
Keeping all other aspects of existing ECB guidelines unchanged, RBI, vide its circular dated 08.07.2013, has allowed asset financing NBFCs (NBFC-AFCs) to avail ECB to finance the import of infrastructure equipment for leasing to infrastructure projects under ‘automatic route’ provided:
ECB can be availed under automatic route from recognised lenders as per the extant ECB guidelines with minimum average maturity period of five years to finance the import of infrastructure equipment for leasing to infrastructure projects;
If NBFC-AFCs avail of ECB in the form of Foreign Currency Bonds from international capital markets, then such ECBs will be permitted to be raised only from those international capital markets that are subject to regulations prescribed by the host country regulator in a Financial Action Task Force (FATF) member country compliant with FATF guidelines;
ECBs (including outstanding ECBs) under the automatic route can be availed upto 75 per cent of owned funds of NBFC-AFCs, subject to a maximum of USD 200 million or its equivalent per financial year;
ECBs by AFCs above 75 per cent of their owned funds will be considered under approval route by Reserve Bank;
The currency risk of such ECBs is required to be hedged in full.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
