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Consolidated Foreign Direct Investment (‘FDI’) Policy - Circular 2 of 2011

The Department of Industrial Policy and Promotion, in line with semi-annual consolidation of the FDI policy framework, issued Circular 2 of 2011 on 30 September 2011 to notify the updated FDI policy. The new policy document introduces certain important changes in the extant FDI policy framework and integrates Press Notes/ Press Releases/ Clarifications / Circulars issued by the Department since the previously notified consolidated FDI policy. Taxand India considers the key changes that have been effected.

Key changes

Instruments with 'options' to lose 'equity' characterisation
The new policy document provides that equity or other instruments convertible into equity having 'in-built' options or supported by options sold by third parties shall not be characterised as FDI. Such instruments shall be subject to the extant External Commercial Borrowings ('ECB') guidelines.

FDI in Single Brand product trading - 'Foreign investor to be the owner of the brand'
The erstwhile consolidated policy document (notified effective from 1 April to 30 September 2011) provided for a number of conditions for FDI (up to 51 percent under approval route) in Single Brand retail trade.

Provisions in relation to pledging of shares and opening of non-interest bearing escrow accounts
The new consolidated policy document, in line with the extant ECB guidelines, contains provisions permitting pledging of shares of an Indian borrowing company (or its associated resident company) by the promoter for the purpose of securing the ECB raised by the borrowing company. Pledging of shares shall be permitted subject to a no-objection certificate from the Authorised Dealer.

FDI in Limited Liability Partnership Firms

Press Note 1 dated 20 May 2011 permitting and outlining conditions for FDI in LLPs has been incorporated in the new consolidated policy document.

FDI in 'Industrial parks' extended for R&D activities in specified sectors
Existing guidelines allow 100 percent FDI under the automatic route for development of infrastructure for the purposes of specified activities falling within the domain of 'Industrial activity'. The scope of such activity has been extended to include basic and applied R&D on bio-technology, pharmaceutical sciences and life sciences.

Taxand India takes a more in depth look at the changes in the full article

Taxand's Take

The new policy document facilitates better comprehension and readability of the FDI policy framework by re-organising similar subjects under common chapters. Certain changes brought about by the new policy document are likely to have far reaching implications; eg, embargo on in-built options for equity/ convertible instruments would have wide ramifications for FDI flow in India across sectors of trade and industry. Also, additional condition as to ownership of the brand for permitting FDI in single-brand retail trade is likely to hurt investment and expansion plans for foreign as well as Indian retailers.

Some of the other much anticipated reforms, for instance enhancing of FDI limits for multi-brand retail sector, defense sector, relaxation of conditionalities for FDI into construction-development sector, remain unaddressed.

Your Taxand contacts for further queries are:

Mukesh Butani
T. +91 124 339 5010

Rajeev Dimri
T. +91 124 339 5050

Taxand's Take Author