Foreign Direct Investment Policy, 2017

On August 28, 2017, the Department of Industrial Policy and Promotion (‘DIPP’) issued the consolidated foreign direct investment policy circular of 2017 (‘FDI Policy 2017’), which replaces the consolidated foreign direct investment policy circular of 2016, dated June 7, 2016 (‘FDI Policy 2016’). The FDI Policy 2017 also consolidates press notes issued by the DIPP since June 7, 2016.

Set out below are the key changes introduced in the foreign direct investment (‘FDI’) regime through the FDI Policy 2017.[1]

i. Conversion of companies and LLPs: The FDI Policy 2016 did not cover or prescribe any rules for conversion of companies into Limited Liability Partnerships (‘LLPs’) and vice versa. The FDI Policy 2017 now provides that conversion of LLPs with foreign investment into a company and vice-versa is permitted under the automatic route, if the converting LLP / company is operating in sectors/activities in which: (a) 100% FDI is allowed through the automatic route; and (b) there are no FDI linked performance conditions. The term ‘FDI linked performance conditions’ has been clarified to mean “sector specific conditions for companies receiving foreign investment”.

ii. Retail trading by wholesale companies: Per FDI Policy 2016, a wholesale / cash & carry trade was permitted to undertake ‘single brand retail trading’. FDI Policy 2017 provides that wholesale/cash & carry traders may undertake ‘retail trading’, i.e., both single brand retail trading and multi brand retail trading (subject to applicable conditions).

iii. ‘State of the Art’ and ‘Cutting Edge’ single brand product retail trading:

a. Press Note 5 (2016 series) dated June 24, 2016 issued by the DIPP did away with local sourcing norms for a period of three years from commencement of business (being, opening of the first store) for entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible.[2]

b. FDI Policy 2017 provides that a committee under the chairmanship of Secretary, DIPP, with representatives from NITI Aayog, concerned administrative ministry and independent technical expert(s) on the subject will examine the claim of applicants on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology where local sourcing is not possible and give recommendations for such relaxation.

iv. E-commerce: Under the FDI Policy 2016, an e-commerce entity with foreign investment was not permitted to effect more than 25% of sales through its market place by one vendor or its group companies. FDI Policy 2017 clarifies that the 25% threshold applies to sales value on a financial year basis.

v. Government approval for additional FDI: Per FDI Policy 2016, additional FDI into the same entity within the approved foreign equity percentage or into a wholly owned subsidiary did not require fresh Government approval. FDI Policy 2017 provides that Government approval will be required for additional FDI within the approved foreign equity percentage or into a wholly owned subsidiary beyond a cumulative amount of Rs. 5,000 crores (approx. US$ 764 million).

vi. Downstream investment intimation: FDI Policy 2017 requires intimation of downstream investments by foreign owned and/or controlled Indian companies to be made to the Reserve Bank of India (‘RBI’) and the Foreign Investment Facilitation Portal within 30 days of the investment (instead of the Secretariat of Industrial Assistance, DIPP and the Foreign Investment Promotion Board, as prescribed earlier).

[1]     This article does not cover changes introduced through press notes and other amendments since June 7, 2016 (which have only been consolidated and introduced in the FDI Policy 2017).

[2]     Incorporated in Note (iii) of Paragraph 5.2.15.3 of FDI Policy 2017