The Department of Industrial Policy and Promotion has issued the Consolidated Foreign Direct Investment policy (pdf) for 2012 today. The consolidated (Foreign Direct Investment) FDI policy document is a single reference point for investors and regulators.
According to the new norms announced by the policy report, Foreign Institutional Investors (FII) can now to invest up to 23 per cent in commodity exchanges without the prior approval of the Government. However, FDI will still require approval from the Foreign Investment Promotion Board. Presently foreign investment, within a composite (FDI and FII) cap of 49 per cent, under the government approval route is permitted in commodity exchanges. Within this overall limit of 49 per cent, investment by registered FIIs is limited to 23 per cent and investment under the FDI scheme is limited to 26 per cent. This change aligns the policy for foreign investment in commodity exchanges, with that of other infrastructure companies in the securities markets, such as stock exchanges, depositories and clearing corporations.
Talking about sectoral foreign holding cap, the Government has finally clarified its stand and issued a norm that says companies will now need prior permission from RBI if the overall FII holding goes beyond 24 per cent. After RBI permission, the companies can allow FIIs to hold more than 24 per cent after the approval for the same by their boards and shareholders. It has been clarified that the activity of leasing and finance, which is one among the eighteen NBFC (Non-Banking finance companies) activities, where induction of FDI is permitted, covers only financial leases and not operating leases.
In the last FDI policy the government had allowed issuance of equity to overseas firms against imported capital goods and machinery including second-hand machinery. However, with a view to incentivise machinery embodying state-of -the-art technology, compliant with international standards, in terms of being green, clean and energy efficient, second- hand machinery has now been excluded from the purview of FDI. This amend has been made seeing the rising concerns from the Indian capital goods sector, including the machine tools industry, construction machinery and textile machinery.
The Government has now permitted Foreign Venture Capital Investors to invest in the eligible securities (equity, equity linked instruments, debt, debt instruments, debentures of an IVCU or VCF, units of schemes / funds set up by a VCF) by way of private arrangement / purchase from a third party also, subject to stipulated terms and conditions. SEBI registered FVCIs have also been permitted to invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI) Regulations, 2000.
However, it is interesting to note that the policy has clarified the Government’s stand around investment in e-commerce ventures in India. It opines e-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in Business to Business (B2B) e-commerce not in retail trading. The policy allows 100% FDI in business to business e-commerce ventures (B2B), but not in retail trading ventures (B2C). B2B e-commerce now falls under the purview of Wholesale Trading which has been defined as sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption.
The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales. It also says that wholesale trading of goods would be permitted among companies of the same group. Wholesale trading to group companies may only take place if it does not exceed 25 per cent of the total turnover of the wholesale venture. This means a lot is at stake for funded and non-funded Indian e-commerce companies. Also the policy regarding Single Brand retail trading has been liberalized and now FDI, up to 100%, is permitted, under the Government route, subject to specified conditions
The Government has also decided that the consolidated FDI circular will be announced every year instead of six-monthly basis. The next policy would be on March 29, 2013.