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Reform: Cabinet Approves Amendments in FDI Policy

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The Union Cabinet chaired by Prime Minister Narendra Modi has given its approval to a number of amendments in the FDI Policy.  These are intended to liberalise and simplify the FDI policy so as to provide ease of doing business in the country.  In turn, it will lead to larger FDI inflows contributing to growth of investment, income and employment.

Foreign Direct Investment (FDI) is a major driver of economic growth and a source of non-debt finance for the economic development of the country. Government has put in place an investor friendly policy on FDI, under which FDI up to 100%, is permitted on the automatic route in most sectors/ activities. In the recent past, the Government has brought FDI policy reforms in a number of sectors viz. Defence, Construction Development, Insurance, Pension, Other Financial Services, Asset reconstruction Companies, Broadcasting, Civil Aviation, Pharmaceuticals, Trading etc.

Measures undertaken by the Government have resulted in increased FDI inflows in to the country. During the year 2014-15, total FDI inflows received were US $ 45.15 billion as against US $ 36.05 billion in 2013-14. During 2015-16, country received total FDI of US $ 55.46 billion. In the financial year 2016-17, total FDI of US $ 60.08 billion has been received, which is an all-time high.

It has been felt that the country has potential to attract far more foreign investment which can be achieved by further liberalizing and simplifying the FDI regime. Accordingly, the Government has decided to introduce a number of amendments in the FDI Policy.

Details:

Government approval no longer required for FDI in Single Brand Retail Trading (SBRT)

(i)      Extant FDI policy on SBRT allows 49% FDI under automatic route and FDI beyond 49% and up to 100% through Government approval route. It has now been decided to permit 100% FDI under automatic route for SBRT.

(ii)      It has been decided to permit a single-brand retail trading entity to set off its incremental sourcing of goods from India for global operations during initial 5 years, beginning 1st April of the year of the opening of the first store against the mandatory sourcing requirement of 30% of purchases from India. For this purpose, incremental sourcing will mean the increase in terms of the value of such global sourcing from India for that single brand (in INR terms) in a particular financial year over the preceding financial year, by the non-resident entities undertaking single-brand retail trading entity, either directly or through their group companies. After completion of this 5 year period, the SBRT entity shall be required to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis.

(iii)     A non-resident entity or entities, whether the owner of the brand or otherwise, is permitted to undertake ‘single brand’ product retail trading in the country for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking single-brand retail trading and the brand owner.

Civil Aviation:

As per the extant policy, foreign airlines are allowed to invest under Government approval route in the capital of Indian companies operating scheduled and non-scheduled air transport services, up to the limit of 49% of their paid-up capital. However, this provision was presently not applicable to Air India, thereby implying that foreign airlines could not invest in Air India. It has now been decided to do away with this restriction and allow foreign airlines to invest up to 49% under approval route in Air India subject to the conditions that:

  1. Foreign investment(s) in Air India including that of foreign Airline(s) shall not exceed 49% either directly or indirectly
  2. Substantial ownership and effective control of Air India shall continue to be vested in Indian National.

Construction Development: Townships, Housing, Built-up Infrastructure and Real Estate Broking Services

It has been decided to clarify that real-estate broking service does not amount to real estate business and is, therefore, eligible for 100% FDI under the automatic route.

Power Exchanges:

Extant policy provides for 49% FDI under automatic route in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010. However, FII/FPI purchases were restricted to secondary market only. It has now been decided to do away with this provision, thereby allowing FIIs/FPIs to invest in Power Exchanges through the primary market as well.

Other Approval Requirements under FDI Policy:

(i)      As per the extant FDI policy, issue of equity shares against non-cash considerations like pre-incorporation expenses, import of machinery etc. is permitted under Government approval route. It has now been decided that issue of shares against non-cash considerations like pre-incorporation expenses, import of machinery etc. shall be permitted under automatic route in case of sectors under automatic route.

(ii)      Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies/ LLP and in the Core Investing Companies is presently allowed upto 100% with prior Government approval. It has now been decided to align FDI policy on these sectors with FDI policy provisions on Other Financial Services. Thus, if the above activities are regulated by any  financial sector regulator, then foreign investment upto 100% under automatic route shall be allowed; and, if they are not regulated by any Financial Sector Regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100% will be allowed under Government approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government.

Competent Authority for examining FDI proposals from countries of concern:

As per the existing procedures, FDI applications involving investments from Countries of Concern, requiring security clearance as per the extant FEMA 20, FDI Policy and security guidelines, amended from time to time, are to be processed by the Ministry of Home Affairs (MHA) for investments falling under automatic route sectors/activities, while cases pertaining to government approval route sectors/activities requiring security clearance are  to be processed by the respective Administrative Ministries/Departments, as the case may be. It has now been decided that for investments in automatic route sectors, requiring approval only on the matter of investment being from the country of concern, FDI applications would be processed by Department of Industrial Policy & Promotion (DIPP) for Government approval. Cases under the government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by concerned Administrative Department/Ministry.

Pharmaceuticals:

FDI policy on Pharmaceuticals sector inter-alia provides that definition of a medical device as contained in the FDI Policy would be subject to amendment in the Drugs and Cosmetics Act. As the definition as contained in the policy is complete in itself, it has been decided to drop the reference to Drugs and Cosmetics Act from FDI policy. Further, it has also been decided to amend the definition of ‘medical devices’ as contained in the FDI Policy.

Prohibition of restrictive conditions regarding audit firms:

The extant FDI policy does not have any provisions in respect of specification of auditors that can be appointed by the Indian investee companies receiving foreign investments. It has been decided to provide in the FDI policy that wherever the foreign investor wishes to specify a particular auditor/audit firm having international network for the Indian investee company, then the audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network.

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Online Retail in India to Multiply by 2.5 Times in the Next Three Years

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The booming e-retail market is likely to surge over twofold over the next three years, as players will be forced to shift their focus from discounts to consolidation, geographical diversification, business realignment and enhancing customer stickiness, says a new report.

According to Crisil, going by the 2016-17 data, the e-retail market represents about 1.5% (Rs 70,000 crore) of the overall Rs 49 trillion retail sector in the country, indicating enormous growth potential.  The online shopping segment has trebled over the past three fiscal years on rising Internet penetration, awareness of online shopping as well as lucrative deals and discounts.

“E-retail market size is expected to surge 250% in the next three years,” the report said without quantifying the industry size by that time.  “After the initial phase where e-retailers focused only on gaining market share through discounts, the next phase will be characterised by consolidation, geographical diversification, business realignment, as well as enhancing customer stickiness,” it added.

Interestingly, the report noted that “a frenzied search for unicorns in the past couple of years ended badly for many investors, who saw their equity wiped out”  and resulted in about 26 prominent start-ups shutting shops in the past two years.

Crisil’s analysis of 11 major e-retail firms showed that almost 45% of the over Rs 40,000 crore invested between FY14 and FY16 was wiped off due to losses at e-retailers.

“Chastened investors are now putting money into just a handful of players that are showing sustainability and enjoy a major market share,” the report said.  “While overall funding increased by over Rs 25,000 crore in the first nine months of the current fiscal year over the previous year, the number of players funded came down 30%, underscoring the caution and sharper focus after the losses,” it added.

Crisil study on 30 companies found that funding for the top three players has increased from 40-45% of overall investments in FY14 to 76-81% in the first nine months of the current fiscal.

“The trend indicates cautious and focused investing by investors with an eye on profitability,” the report said.  “The industry is now 8-10 years old and is moving from the startup phase to more consolidated phase. Going forward, funding will only get more concentrated with big-ticket players getting the bulk of the pie. Niche players will get funding, but in bits and pieces,” it added.

Crisil also found that the e-grocery, which has lately seen an uptick in the number of players and investor interest, is likely to be the next big online segment following apparel, mobile phones.

Online grocery is to be the fastest growing segment with an average growth rate at 65-70% between fiscals 2017 and 2020, while the revenues may quadruple over the next three years to Rs 100 billion.

The growth in the segment would be driven by investments in technology, new strategies adopted by players such as introducing private labels, same day and next day delivery as well as B2B food services.  “In the overall food retail industry, the penetration of online food and grocery stands at a minuscule 0.1%, indicating significant growth potential,” the report said.

Investments in the high-volume, low-margin segment rose over seven times in the first nine months of FY18 to Rs 20 billion, as niche players like BigBasket and Grofers were forced to fight with biggies like Amazon and Flipkart, apart from brick-n-mortar players like D-Mart, and Reliance Retail sharpening focus.

Meanwhile, noting that online customer base remains largely concentrated in major cities, the report said faster growth will slow down in these regions as it is already highly penetrated and players would need to move into small towns to sustain growth.

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REFORM: Govt Approves Private Participation in Commercial Coal Mining

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In one of the biggest reforms in the mining sector, the government has approved private and international participation in commercial coal mining. The move is likely to augment availability of coal and act as a major catalyst for the industry.

The government has initiated one of the biggest reforms in the mining sector. Union Cabinet on Tuesday approved private and international participation in commercial coal mining. The move is likely to augment availability of coal and act as a major catalyst for the industry. The decision was taken at the Cabinet meeting under the chairmanship of Prime Minister Narendra Modi.

Union Cabinet also approved 130 km long Jeypore-Malkangiri New Line project at a cost of Rs. 2676.11 crores. It will help in combating the left wing extremism through development in the districts of Malkangiri and Koraput. It will also improve connectivity to important towns, including Koraput, Jeypore, Jagdalpur, Dantewara and will result in short lead to many places in Odisha, Chhattisgarh and Andhra Pradesh.

Union Cabinet also approved Bill to ban illicit deposit-taking activities; Bill provides for severe punishment and heavy fines for those raising illegal deposits.

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Three More PNB Officials Arrested

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The Supreme Court has agreed to hear a Public Interest Litigation (PIL) seeking deportation of Punjab National Bank fraud accused Nirav Modi, on Friday.

A three-judge bench comprising Chief Justice of India, Dipak Misra, Justices AM Khanwilkar and DY Chandrachud today said, the bench will hear the matter on Friday.

The PIL sought Nirav Modi’s deportation within two months for his alleged involvement in the syphoning off Punjab National Bank money to the tunes of 11,400-crore rupees.

It sought immediate and strict action against those PNB and Reserve Bank of India officials involved in the fraud case. The PIL also sought new guidelines for the big loans.

Three officials of Punjab National Bank’s Brady House branch in Mumbai were arrested on Monday in connection with the 11,400 crore rupees fraud by diamond merchant Nirav Modi.

Meanwhile, ED raids continued for the fifth straight day at 35 locations on Monday.

The agency has so far seized diamonds, gold jewellery and other precious stones worth Rs 5,716 crore in the case and summoned Modi and Choksi, the promoter of Gitanjali Gems, to appear before it on February 23 at its Mumbai zonal office.



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