India


wait for further liberalisation gestures from other states or go ahead to take the first mover advantage with the expectation that once the benefits are seen and experienced, more states will also allow shops to be set up. It is interesting to note that, even when foreign


investment under the FDI Policy was prohibited in multi-brand retail, FII investment in Indian compa- nies operating in this sector was permitted under the Portfolio Investment Scheme. The Scheme and Sebi (FII) Regulations permit FIIs to invest in shares and convertible debentures of listed Indian companies subject to the limit of individual FII investment up to 10% of the capital of the company and aggregate FII investment up to 24% of the capital of the company. FII investment in publicly-listed entities such as Shoppers Stop and Future Group (Big Bazaar) or subsidiaries of listed entities such as Reliance Retail have been in existence for many years with the main difference being that all these companies are owned and controlled by Indian groups and the foreign investor is an FII with no management interest or rights. Another interesting aspect is the total prohibition


on e-commerce, both single and multi-brand. Until now, there was no specific prohibition on e-commerce in single brand retail and private equity and venture capital investors have invested in many emerging and start-up companies in this trade. Continued invest- ments in these companies is now in doubt creating two main issues. The first is the choking of funding avenues and consequently expansion plans for growth for the Indian entrepreneur who has obtained such funding earlier. The second is the possible loss of rights in companies for the foreign investor whose rights will be diluted when the investor is not allowed to invest further to preserve its equity ownership percentage. However, amazon.com, like most other foreign


retailers, entered the Indian market in an indirect manner through its Indian arm, junglee.com. Up to 100% FDI is permitted in B2B wholesale operations. Hence large e-commerce companies may continue to sell through the B2B segment adopting this method or tie up with local retailers for distribution and sale of their products. The FDI Policy contains a statement clarifying


that investments made under earlier policies, if valid and permitted as per the prevailing policy at the rele- vant time when such investment was made, would continue to be valid under the revised policy,


regardless of the changes announced from time to time. This provides a measure of comfort for foreign investors that investments would not be subject to the vagaries of policy changes.


Other sector-specific changes The aviation sector has been liberalised in light of the huge challenges faced by the national carrier as well as private players The extant FDI policy has been amended to allow foreign airlines to invest in sched- uled and non-scheduled air transport services (domestic scheduled passenger airlines, non-sched- uled air transport services, helicopter and sea services) up to 49% (cumulative under both the FDI and FII investment route). The investment is subject to con- ditions including FIPB approval, the place of busi- ness of the investee scheduled operator being in India and substantial ownership and control over the oper- ator/company being with Indian nationals. Therefore, while allowing equity participation to the extent of 49%, the government has specifically retained ownership and strategic control rights with Indian nationals. In the pharma sector, 100% FDI under the auto-


matic route is allowed in new projects. Last year, FDI in existing pharmaceutical companies was brought under the government route (100% FDI permitted). This sector had been under the automatic route for almost a decade but a large number of acquisitions of Indian pharma companies attracted the government’s attention to this sector. To provide for better oversight, all mergers and acquisitions in this sector require FIPB approval and will be vetted thereafter by the Competition Commission of India. This policy change is, however, still under debate


as the finance ministry wants only cases involving FDI beyond 49% (in brown field projects) to be consid- ered by FIPB. On the other hand, the Department of Industrial Policy and Promotion wants any foreign investment in existing pharma units to be approved by the FIPB. The insurance sector was opened up to the private


sector in 2000. In October 2012, the government gave its assent to raising the limit of FDI in the insur- ance sector from the present 26% (automatic route) to 49% (26% FDI route and 23% FII route). Under the new regime, foreign re-insurers will be permitted to open branches only for re-insurance business in India. The capital requirement for a health insurance company is now proposed at INR500 million ($9 million) – as opposed to INR1 billion for general


insurance companies – with a view to reducing the entry barrier to a priority sector in the insurance space. This change in the policy has not yet been notified


by the Department of Industrial Policy and Promotion in the FDI Policy but is expected to be incorporated shortly. Also, the necessary amendments in the governing legislation are expected to be incorporated by the government in the winter session of Parliament. In September 2012, the government raised the


foreign investment cap to 74% (automatic up to 49%, approval route beyond 49% up to 74%) in tele- ports (setting up of teleports), Direct to Home, cable networks (multi-system operators operating at nation- al state and district level), mobile TV and Headend- in-the-sky broadcasting service segments. Foreign investment in other cable networks is set at 49% under the automatic route. These investment caps comprise of FDI, FII, non-resident Indian invest- ments and foreign currency convertible bonds or ADRs/GDRs and convertible preference shares held by foreign entities. The FDI Policy permits up to 100% FDI under


the automatic route in the power sector (except atomic power). This comprises of generation, trans- mission and distribution of electricity and power trad- ing. With the recent amendment to the FDI Policy, foreign investments to the extent of 49% of the paid- up capital (23% FII and 26% FDI) have been allowed in registered power exchanges. The FDI component of the investment is under the government route whereas FII investment is permissible under automat- ic route. No non-resident entity/investor (including persons acting in concert) is permitted to hold more than 5% of the equity in these companies. The FDI Policy provides extensive guidelines relat-


ing to inflow of foreign investments in the main sec- tors as well as sensitive sectors affecting the country’s economy. Some of the other sectors that find a men- tion in the FDI Policy are telecoms, banking, mining, construction development, industrial parks and manufacturing. India has been a lucrative investment hub and,


with the recent amendments, the restrictions that were preventing inflow of capital have been relaxed. The policy changes that are now being brought about are just about accurate enough to draw a balance between the interests of the business entities, the investors and the end consumers. But there is still a long way to go before India becomes a mature and fully tapped economy,.


About the author Vijaya Sampath is a senior partner heading the corporate law practice of Lakshmikumaran and Sridharan and also serves as the Ombudsperson and Advisor to the Group Chairman and CEO of the Bharti group, a leading conglomerate in India with operations in over 20 countries. She has been in the legal profession for over thirty years as inhouse legal


counsel for large Indian groups and multinationals and a partner with a well known law firm. Until recently, Sampath was the group general counsel and company secretary of the Bharti group. Sampath’s strength is her expertise in corporate and commercial law. She


has successfully led teams in complex joint ventures, cross border acquisitions, private equity investments and international commercial arrangements besides


providing litigation strategy and legal advice. She was also responsible for the conduct of Board and shareholder meetings, and preserving the highest standards of transparency and governance.


Contact information


Vijaya Sampath Lakshmikumaran and Sridharan


5 Link Road, Jangpura Extension , New Delhi - 110 014, India T: +91 11 41299976 F: +91 11 41299899 E: vijaya.sampath@lakshmisri.com W: www.lslaw.in


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