No government in the past had been even subject to the enormous and multiple challenges in governance that the present dispensation faces. Issues and concerns making the challenges monumental include the perceived low public confidence and credibility in the government, instances of corruption of never-heard-before proportions inflicting numerous sections of the dispensation, inept handling of sensitive issues like the 2G spectrum allocation allegations, the Anna protests and negotiations over demands of Team Anna and the recent spat between to senior most cabinet colleagues with the PMO almost being a mute spectator and so on. Governance could never have been this low on the national agenda.

In this background and circumstances, the central government (through the ministry of commerce and industry – department of industrial policy & promotion or DIPP) has issued the new Consolidated FDI Policy effective from October 1, 2011 replacing the earlier Consolidated FDI Policy (‘Old FDI Policy’) effective from April 1, 2011.

The FDI Policy seeks to regulate the foreign direct investment into India in the various manufacturing & service sectors.  Some key changes made to the Old FDI Policy vide the New FDI Policy concerning various sectors/issues and its implications are as follows:

1. Real estate sector:
(Relaxation for construction and development activity concerning education and elderly care.)
The New FDI Policy has delinked construction developments concerning education sector and old-age homes from the real estate construction and thus has set the construction and development activity for these two purposes free from the conditions otherwise applicable on real estate construction. These conditions include minimum built-up area, minimum capitalisation of $5 million to $10 million and lock-in period of three years. Hotels and tourism, hospitals, SEZs and investment by NRIs were already kept outside these conditions in the Old FDI Policy.

2. Scope of ‘industrial activity’ for setting up industrial parks under automatic route:

The New FDI Policy has now included ‘basic and applied R&D on bio-technology, pharmaceutical sciences/ life sciences’ as an industrial activity for setting industrial parks under the 100% holding vide automatic route. This would thus opens the gates for automatic route investments in projects in which quality infrastructure in the form of plots of developed land or built up space or a combination with common facilities for the said activities. This move comes alongside the proposed bio-technology bill and shows the resolve of the government to keep the focus for developing new emerging sunrise industries.

3. Agriculture sector:

Under the New FDI Policy apiculture (bee-keeping) has been allowed under the category of permitted agricultural activities under controlled conditions with 100% holding under automatic route. The Old FDI Policy permitted investments in floriculture, horticulture and cultivation of vegetables and mushrooms in a similar manner under controlled conditions with 100% holding under automatic route. This move is a step forward in rationalising the controls and restrictions on FDI in agriculture sector on the one hand and to necessity to bring home the needed technology and expertise to keep afloat the agricultural activities not doing well.

4. FM radio:
The New FDI Policy has increased the permitted FDI in terrestrial broadcasting/FM Radio to 26%. The Old FDI Policy provided a cap of 20%. The increase of the cap from 20% to 26%, although falling short of the wish of the industry, will further help the cash-strapped FM radio sector to leverage funds through FDI to meet the expansion and roll out plans in tier-2 and -3 cities.

5. Conversion of imported capital goods/machinery into equity:

The New FDI Policy has further relaxed the provisions governing the conversion of imported capital goods/machinery and pre-operative/pre-incorporation expenses into equity instruments permitted under the Old FDI Policy. 

The Old FDI Policy provided a time limit of 180 days for the shipment for undertaking the conversion whereas the New FDI Policy has rationalised the timelines to now require on the application for the conversion to be made within 180 days of the shipment.

The New FDI Policy further permits pre-incorporation/pre-operative expenses to be paid by the foreign investor to the Indian company directly into the bank account of the Indian company – which leaves one guessing how would such Indian company come to have a bank account even before its incorporation. The procedure would need to be further corrected to remove such gaps in the next consolidated FDI Policy, one hopes.

6. Pledge of shares for ECB:

The New FDI Policy now allows promoters of an Indian Company to pledge their shares in an Indian company against external commercial borrowings (ECB) raised by such company from foreign lenders. Further a NRI holding shares in the Indian company may pledge such shares to (i) secure credit facilities given to such Indian company by an Indian bank, and (ii) secure credit faculties given to such NRI/ non-resident promoter of the Indian company or its overseas group company by overseas bank. The pledge of shares is also subject to applicable terms and conditions as contained in the New FDI policy. This relaxation should enable making inflow of funds via ECBs more attractive to financial institutions and should give a boost to access of overseas/ECB funds to Indian Companies.

7. Relaxations concerning escrow accounts:

The New FDI Policy permits foreign investors to open escrow accounts in India towards payment of share purchase consideration or for keeping securities. The approval earlier required from RBI can now be obtained from the authorized dealer bank. 

 The New FDI policy and the improvements it makes over the Old FDI policy shows that the liberalisation agenda of the government and the FDI policy are firmly on course – amidst increasing concerns over the pace of the liberalisation process itself. It should also be kept in mind that with each FDI policy having a sunset clause of six months, expecting major policy shifts every six months would be contrary to a sustained regulatory and policy reforms over a period of time.

Notwithstanding the growing deficit between industry expectations and the FDI policy, the government of the day should be given credit for building on the FDI policy reforms already initiated in the earlier policies and introducing rationalisation and relaxations in a sustained manner based on circumstances concerning specific sectors. The next FDI policy is less than 6 months away now. Hence the task is cut out for the government as well as the stakeholders to work towards next level reforms in the FDI policy together.

The author will follow with specific insights on the specific impact of the New FDI Policy on various industries and stakeholders in the weeks to follow.