Consolidated FDI Policy Circular of 2020:

The Department for Promotion of Industry and Internal Trade (“DPIIT”) has, vide press release dated October 28, 2020, released the consolidated foreign direct investment policy circular of 2020 (“FDI Policy 2020”), to be effective from October 15, 2020. The consolidated FDI Policy was released after a gap of 3 years.

The FDI policy 2020 consolidated the changes introduced to India’s FDI regulation since the previous policy was implemented (August 28, 2017). These include respective press notes issued by the Department for Promotion of Industry and Internal Trade (DPIIT) and RBI regulations over the last three years.

The Revised Policy a ready reckoner to understand the Indian foreign investment framework. The key changes in FDI Policy 2020 are:

Changes in the Definitions: 

  • Control : The definition of ‘control’ has now been aligned with the definition of Control as used in the Companies Act, 2013 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.The scope of the definition of Control has been expanded to include right to control the management or policy decisions, exercisable by a person or person acting individually or in concert, directly or indirectly.
  • Downstream Investment : The definition of a downstream investment is defined to specially include the method i.e. (subscription or acquisition) by which an indirect foreign investment by an eligible Indian entity is invested into another Indian Company/LLP.
  • Warrants : Under the definition of ‘Capital’, it is clarified that it includes warrants. Warrants have been explained to include share warrants issued by an Indian company in accordance with the regulations by the Securities Exchange Board of India (“SEBI”) and the provisions of the Companies Act, 2013. [Compliance with regulations prescribed by SEBI in case of issuance of share warrants was not required under the previous FDI Policy of 2017].

Government scrutiny of investments from India’s neighboring countries

An entity of a country, which shares land border with India (i.e. countries such as China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan) or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under government route. Further, paragraph 4.1(ix)(a) of the FDI Policy of 2020 sets out that the applications involving investments from an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country as required in terms of Press Note read with the Non-Debt Instruments Rules requires approval from the competent authority identified by DPIIT.

Limited Liability Partnerships (“LLPs”) allowed to avail the foreign funding

Any investment (by way of capital contribution or acquisition of transfer of profit shares of LLP) made by a person resident outside India on a repatriable basis to the capital of a limited liability partnership is now recognised as valid foreign investment under FDI Policy 2020.
Investment cap on digital news media
A 26% cap on equity / FDI has been introduced in the segment that covers digital news (uploading or streaming of news and current affairs through digital media), which also requires government approval. This brings it at par with the investment cap on newspaper and periodical publications and the publication of Indian editions of foreign magazines dealing with news and current affairs, which are also subject to the government approval route. Detailed guidelines on foreign direct investment into the broadcasting sector are provided in the Policy.
Compliance obligations for e-commerce entities
The FDI policy 2020 states that it is mandatory for e-commerce entities with foreign investment to obtain and maintain a statutory audit report by September 30 every year for the preceding financial year, which indicates their compliance with India’s laws. This compliance requirement was first introduced in 2019. The  FDI policy 2020 circular also details the recent changes in regulating foreign investment in e-commerce in India, which includes the following:

  • Prohibiting an entity related by equity to the e-commerce platform from doing business on the website portal;
  • Restricting vendors from buying more than 25 percent of their inventory from the platform and its group companies; and
  • Banning exclusive product launches.

These norms regulating e-commerce entities were implemented from 2018.

100 percent FDI under automatic route is permitted in the marketplace model of e-commerce in India. The marketplace-based model means the e-commerce entity essentially provides an information technology platform on a digital and electronic network – to act as a facilitator between buyer and seller.

Thus, e-commerce entities in India that receive FDI can only engage in business to business (B2B) e-commerce and not in business to consumer (B2C) e-commerce.