The Department of Industrial Policy and Promotion (DIPP), recently released the consolidated foreign direct investment (FDI) policy circular of 2017 (FDI Policy). The new FDI Policy is effective immediately from the
date of its publication, i.e., 28 August 2017. The New FDI Policy supersedes the consolidated FDI policy of 2016 issued by the DIPP.

E-commerce: e-commerce being flavour of the season attracted lot of FDI in this sector. Under the earlier FDI policy, there was a prohibition on an e-commerce entity from permitting more than 25% of the sales affected through its market place from one vendor or its group companies. The new FDI Policy clarifies that the 25% of sales value
must be computed per financial year.

FDI in LLPs: There was no mention of conversion of an FDI funded Limited Liability Partnership (LLP) into a company and vice versa in the earlier FDI policy. The new FDI Policy allows conversion of an FDI funded LLP
operating in sectors/activities where (i) 100% FDI is allowed through the automatic route; and (ii) there are no FDI linked performance conditions, into a company, under the automatic route. Similarly, conversion of an FDI funded company operating in sectors/activities where (i) 100% FDI is allowed through the automatic route; and (ii)
there are no FDI linked performance conditions, into an LLP, is permitted under the automatic route.

FDI linked performance conditions: FDI is permitted in LLPs operating in sectors/activities where: (i) 100% FDI is allowed through the automatic route; and (ii) there are no FDI linked performance conditions. While the earlier FDI Policy was silent on what constituted FDI linked performance conditions, the New FDI Policy has defined FDI linked performance conditions as sector specific conditions for companies receiving foreign investment.

Start ups: to promote ease of doing business in India and promote the start-up culture, the new FDI Policy contains provisions specific to start-up companies for the first time. The start-up companies can issue equity or equity
linked instruments or debt instruments to foreign venture capital investor (FVCI) against receipts of foreign remittance, as per the FEMA Regulations. In addition, start-ups can issue convertible notes to person resident
outside India, subject to certain conditions mentioned therein. This was already notified by the Reserve Bank of India (“RBI”) vide Notification No. FEMA.377/2016-RB dated January 10, 2017 and amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FEMA 20) were made to allow startups to issue convertible notes to foreign investors. The new FDI Policy provides for the definition of “Convertible Notes” which means an instrument issued by a startup company evidencing receipt of
money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such start-up company within a period not exceeding five (5) years from the date of issue
of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument. A person resident outside India (other than citizens/entities of Pakistan and
Bangladesh) will be permitted to purchase convertible notes issued by an Indian start-up company for an amount of Rs. 25 lakh or more in a single tranche.

Cash & Carry Wholesale Trading: The earlier FDI Policy subject to the conditions related to FDI in single brand retail trading allowed a wholesale/cash & carry trader to undertake single brand retail trading. However, the new
FDI Policy, by doing away with the reference of ‘single brand’, allows wholesale/cash & carry traders to undertake retail trading by way of both single brand retail trading as well as multi brand retail trading, through the
same entity, subject to prescribed conditions.

Single Brand Retailing: Sourcing norms have been relaxed up to three (3) years from the date of commencement of the business, i.e. opening of the first store for entities undertaking single brand retail trading of products having ‘state-of-art and ‘cutting edge’ technology and where local sourcing is not possible, pursuant to which the provisions of Paragraph 5.2.15.3 (2)(e) will be applicable. Further, a committee under the Chairmanship of Secretary, DIPP with representative of NITI Ayog, concerned Administrative Ministry and independent technical expert(s) on the
subject will examine the claim of applicants on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology where local sourcing is not possible and give recommendations for such relaxation.

Foreign Investment Promotion Board (FIPB) abolished: The FIPB was abolished vide office memorandum dated June 5, 2107 issued by the Department of Economic Affairs, Ministry of Finance. Further, DIPP released a standard
operating procedure (SOP) on June 29, 2017 for processing FDI proposals which inter-alia listed out the competent sectoral authorities for grant of approval for foreign investment with respect to sectors/activities requiring
Government approval available at http://www.fifp.gov.in/Forms/SOP.pdf .

Intimation of Downstream Investment: Under the new FDI Policy, an entity is required intimate Reserve Bank of India (RBI) and the Foreign Investment Facilitation Portal of its downstream investment in place of notifying the Secretariat of Industrial Assistance, DIPP and FIPB as required under the old FDI policy.

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