FDI policy 2018: Another opportunity for Narendra Modi govt to push out pro-investment reforms

Foreign Direct Investment (FDI) in India is expected to grow significantly following the implementation of recent Government of India (GOI) initiatives, including the Goods and Services Tax (GST) related reforms, enactment and implementation of the Insolvency and Bankruptcy Code (IBC), demonetisation, and other ease of doing business reforms rolled out recently by the central government. These reforms have boosted India’s image as a preferred destination for foreign investment, with many sectors being fully available to foreign investors for making investments without any restrictions. These reforms resulted in India, for the very first time, figuring in the top 100 in the World Bank’s ‘Ease of Doing Business’ global rankings, on the back of sustained business reforms by the Narendra Modi-led government. The World Bank’s report also recognizes India as one of the top 10 improvers in last year’s assessment, having implemented reforms in eight out of 10 ‘Doing Business’ indicators. On the “distance to frontier metric,” India’s score has also witnessed a significant jump, which reflects improvements in India’s business regime in the last year itself. The upcoming foreign direct investment policy (FDI policy) 2018 presents another such opportunity to further boost investor confidence. In this piece, we highlight some of the key changes that may be considered to the existing FDI policy: 1) Definition of real estate business: Currently, the FDI policy defines a ‘real estate business’ as “dealing in land and immovable property with a view to earning profit or earning income ( ..)”. However, the phrase “dealing in land and immovable property with a view to earning profit or earning income therefrom” has not been defined in the FDI policy. It is therefore unclear as to whether a one-off transaction of sale of immovable property by a foreign-owned and controlled company whose main objects under the memorandum of association does not deal in land and immovable property, would be tantamount to a real estate business. The term ‘dealing’ may be extended only to activity that is in the ordinary course of business for a company i.e., permitted by the main objects clause of the memorandum of association of such a company. Therefore, it is suggested that the Department of Industrial Policy and Promotion (DIPP) amends the FDI policy to clarify that a one-off sale of immovable property by a ‘foreign owned’ and ‘foreign controlled’ Indian company, engaged in an activity under the automatic route whose main objects does not deal with land and immovable property, would not be tantamount to be engaged in the ‘real estate business’. [caption id=“attachment_1606415” align=“alignleft” width=“380”]  Representative image. Reuters[/caption] 2) Definition of ‘e-commerce entity’: Currently, it is not clear whether a company incorporated under the Companies Act 1956 or the Companies Act 2013, owned and controlled by a person resident in India, having secured foreign investment of less than 50 percent (which would not qualify as an e-commerce entity under the FDI Policy) can carry on the inventory-based model of e-commerce. The DIPP may amend the FDI policy to clarify as to whether a company that is owned and controlled by a person resident in India and carrying out an inventory-based model of e-commerce is permitted to have foreign investment of less than 50 percent of its capital. 3) Sale of bundled goods and services: DIPP may amend the FDI Policy to clarify that the FDI Policy only restricts sale of bundled goods and services through internet-based commerce activities and not a pure sale of services as a stand- alone venture. A clear definition of ‘service’ should be provided in the FDI policy to specify if a provision of intangible goods online would be considered as ‘provision of services’ or ‘sale of intangible goods’. 4) Insurance sector reforms: In view of the current FDI Policy, FDI in a limited liability partnership (LLP) that is engaged or proposed to engage in sectors where 100 percent FDI is not permitted, such as the insurance sector business, may not be permissible under the current FDI Policy as FDI in a LLP is allowed only in those sectors where 100 percent FDI is allowed under the automatic route. Recently, the Insurance Regulatory and Development Authority (IRDA) notified the Insurance Regulatory and Development Authority (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines 2017 (Guidelines) wherein private equity funds that propose to invest as “promoters” in the Guidelines are prohibited from investing directly in an Indian insurance company and the investment has to routed via a special purpose vehicle (SPV). The Guidelines requires that the SPV be either a company registered under the Companies Act, 2013 or an LLP registered under the Limited Liability Partnership Act, 2008. In view of the Guidelines, “foreign Investment in insurance sector through usage of LLPs should be specifically permitted subject to the guidelines released by IRDA” Secondly, the FDI policy effectively applies the same 49 percent automatic route cap for FDI in an insurance company and intermediaries, such as an insurance broker, despite insurance companies and insurance brokers undertaking different activities, and insurance companies being subject to greater scrutiny. Insurance brokers act for their clients and not for insurance companies and have a fiduciary duty towards their clients. Accordingly, similar FDI treatment of an insurance company receiving and investing public funds and an insurance broker is neither warranted nor necessitated. DIPP should consider amending the FDI policy to provide for 100 percent FDI for insurance brokers. To conclude, the FDI policy 2018 presents an excellent opportunity to ride on the recent wave of reforms initiated by the Modi government. It is hoped that FDI policy 2018 will be investor-friendly and encourage foreign investments in India. (Views are personal. Pandey is a Partner and Padhi, Senior Associate with Khaitan & Co)