In a year wherein the central government was accused of policy paralysis, it has packed the latter part of the year with significant reforms by bringing in a slew of reforms in the Foreign Direct Investment (FDI) policy. In spite of severe uproar and protests from the opposition parties and activists, the government was successful in getting a green signal for FDI in multi-brand retail from both houses of the Parliament.
It was created with the release of Press Notes No. 4 to 8 by Department of Industrial Policy & Promotion (DIPP) and the same was followed by the institution of a PIL by a Delhi lawyer in the Supreme Court challenging on the ground that the same press notes are ultra vires as relevant provisions within Foreign Exchange Management Act (FEMA) had not been amended. The Attorney General informed the Hon’ble Court that Reserve Bank of India (RBI) has amended the FEMA Regulations to now allow implementation of the government’s policy and the same has officially been notified in official gazette on 30th October, 2012.
Through the gazette, the RBI has made amendments in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Third Amendment) Regulations, 2012 by powers conferred by section 6 (3) (b) and section 47 of the Act. Major changes are in the aforesaid Regulations to make the investment in India more investor friendly and self regulated. New series of investors have been allowed to invest directly into securities subject to prescribed conditions. The most significant amendment via the new reforms have been in opening up a sector which was previously prohibited. Annexure A of Schedule 1 of the said Regulation has been amended by deleting the prohibition on retail trading, thus allowing FDI in multi-brand retailing, which was the most awaited one for big foreign retail players.
The RBI has also notified the amendments providing sectoral holding in multi-brand retail. The FDI in multi-brand has been permitted up to 51 per cent through the government approval route in all products subject to the conditions mentioned therein. The minimum investment to be brought into this sector has to be US dollar 100 million, 50 per cent of which should be invested in backend infrastructure within three years of the first tranche. The restriction of procuring 30 per cent of the value of manufactured/processed products from the Indian small scale industries, which have capital of not more than US dollar 1 million, has been made mandatory. The self regulation regime has been followed for compliance of the preconditions by the companies in this sector.
Retail sales outlets can be set up only in cities having a population of more than 10 lakh as per the 2011 census, covering an area of 10 kms around the limits of that city. The government has retained the first right to procure the agricultural products. The state governments/union territories (UTs) have been given liberty to take decision as regard to implementation of the policy in their state and/or territories.
The retail trading in any form by means of e-commerce has been made nonpermissible for companies with FDI in multi-brand retailing.
Earlier this year, the government relaxed rules for single-brand retail by allowing non-resident entities, who may not be the owners of a brand to take license from the owner of the brand and establish a subsidiary in India by investing up to 100 per cent. The onus for ensuring compliance with this condition was fixed on the Indian entity carrying on the retail trading in India. However, retail trading, in any form by means of e-commerce, has been made non-permissible in this sector also.
The RBI, through the same gazette, has also inserted the definition as to the Qualified Foreign Investor (QFI) in the Regulation and has allowed a QFI to purchase securities, other than shares or convertible debentures of an Indian company, subject to the terms and conditions specified in Schedule 5.
The QFIs can also purchase shares as per the conditions mentioned in Schedule 8, as inserted in the same Regulation. The RBI has also removed prior permission requirement for transfer of shares or convertible debentures under Regulation 10 of an Indian company, whose activity fall under Annexure B to Schedule 1 subject to specified conditions.
The amendment in Schedule 1 has also allowed issue of shares to a person resident outside India against import of secondhand machinery, which was not allowed prior to this amendment. The amendment has been made in para 1 of the Schedule 5 allowing Foreign Institutional Investors (FIIs) to purchase securities directly on repatriation basis from the Issuer/Stock Exchange/Registered Stock Broker subject to the conditions mentioned therein
The move is indeed important to welcome more investment in India and to boost the economy of India as a whole thus providing more competitive edge to the consumers of India. The move has been made from the government’s side and the government now awaits a successful chain of investment in the more liberalised sectors, primarily the retail, so as to achieve the growth expectations of all and send a positive signal to the foreign investors.
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