2018 began with a bang for foreign investors as India made multi-fold changes to its FDI Policy. The IMF also forecast India would become the fastest growing economy in 2018 and 2019. The Bar Council of India denounced the changes suggested by the Law Commission of India. India celebrated its 25 years of partnership with ASEAN countries and invited their leaders to be the chief guests for the coveted Republic Day celebrations on January 26, 2018.

Changes in FDI Policy – The Ministry of Commerce and Industry, Government of India issued Press Note 1 (2018 Series) wherein sweeping relaxations in foreign direct investment (FDI) rules were announced in single-brand retail and other areas besides allowing overseas carriers to acquire as much as 49% of Air India to help speed up its divestment. Overseas retailers can now delay having to meet the 30% local sourcing norm by five years, removing a significant stumbling block. Approvals for such investments have also been made automatic. Single-brand retailers can set off “incremental sourcing of goods from India for global operations during an initial five years, beginning April 1 of the year of the opening of a first store against the mandatory sourcing requirement of 30% of purchases from India”. After five years, the firm will have to meet the sourcing norm every year. The cabinet also allowed overseas airlines to own up to 49% in Air India subject to conditions. The earlier policy allowed foreign airlines to own up to 49% in Indian carriers but excluded Air India.

The cabinet committee on economic affairs (CCEA) approved 100% FDI in real estate brokering services and allowed foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) to invest in power exchanges through the primary market as well.

The FDI policy for pharmaceuticals was amended to stipulate that the definition of a medical device would be that included in the policy. This was earlier subject to any amendment of the definition in the Drugs and Cosmetics Act.

The changes cover audits as well. An FDI investor can ask for the audit of an investee company by a particular auditor or audit firm having an international network. In such cases there will be a joint audit where one of the auditors is not part of the network sought by the FDI investors.

IMF’s Forecasts India as Fastest Growing EconomyThe International Monetary Fund (IMF) remains bullish on India’s growth potential and has retained its GDP forecast for the country at 6.7 per cent in 2017 and 7.4 per cent in 2018. In its World Economic Outlook Update, it also estimated that the Indian economy would grow by 7.8 per cent in 2019, which makes the country the world’s fastest-growing economy in 2018 and 2019, the top ranking it briefly lost in 2017 to China. “The aggregate growth forecast for the emerging markets and developing economies for 2018 and 2019 is unchanged… Growth is expected to…pick up in India…,” said the report, which was released ahead of the World Economic Forum meeting in Davos.

The projection is in line with official estimates from the Central Statistics Office, which pegged GDP growth at 6.5 per cent this fiscal year.

Bar Council Study of Law Commission’s RecommendationsSubmitting its report to the Bar Council of India (BCI), the sub-committee  was constituted by the BCI to study the 266th report of the Law Commission of India (LCI) amendments to the Advocates Act 1961 and regulation of legal profession — saying the report suggests undemocratic changes which will pull back the legal profession into the dark shadow of emergency. The sub-committee also considered various suggestions received from bar associations across the country while considering the report of the Law Commission, which suggests sweeping changes in the Advocates Act like rules against strike, nomination over election etc. The reasoning given in report indicate that the sub-committee is of the firm view that the democratic structure of state bar councils and Bar Council of India cannot be disturbed, and a retrograde step cannot be taken to reverse the status of the Bar council which was existing prior to the adoption of the Constitution.

The LCI report and BCI’s opposition to it had been reported by Asia Law Portal in April 2017. Further, BCI’s rejection of the LCI report had been reported by Asia Law Portal in July 2017.

ASEAN Leaders at India’s Republic Day Celebrations – India invited the leaders of ASEAN countries as chief guests for its 69th Republic Day Celebrations on January 26, 2018. India has had a history of hosting a chief guest from a foreign nation at its Republic Day Parade in New Delhi. However, having 10 Heads of State/Government in our midst to witness the most spectacular show of our nation, made this Republic Day Parade so special. It clearly signifies India’s strengthening relations with the ASEAN and ASEAN nations, keeping in sync with India’s ‘Act East Policy’.  Prime Minister Pravind Jugnauth (who also holds the finance ministry portfolio) has proposed in his budget speech on June 8 to strengthen the ‘substance’ norms for entities operating under Category 1, Global Business Licence. These entities are referred to as GBC-1 companies.

Foreign portfolio investors (FPIs), offshore funds and other entities that invest in India via the Mauritius route will now have to satisfy any two of the secondary (or additional) substance conditions instead of just one to prove they have adequate commercial substance in Mauritius and are not just shell companies or post-box entities (see graphic).

Mauritius-based entities engaged in investment activities typically opt for a GBC-1 licence as this enables them to take advantage of tax treaties entered into by Mauritius. A major chunk of India’s foreign direct investments (FDI) flow in from such companies. During 2016-17, Mauritius was the top source of FDI into India, with inflows of Rs 1,05,587 crore (or 33% of total inflows). GBC-1 companies were always required to be ‘controlled and managed’ in Mauritius.

For this, they were mandatorily required to have at least two Mauritius-resident directors who had relevant qualification and experience and were actively involved in the control and management of the company, the principal bank account was to be in Mauritius, and accounts were required to be kept and audited in Mauritius.

Subsequently, the Financial Services Commission in Mauritius required GBC-1 companies to meet by January 1, 2015 any one of the additional substance conditions — an office in Mauritius, an administrative full-time employee, resolution of disputes arising out of the constitution of the company (akin to the Memorandum and Articles of Association under Indian law) via arbitration, holding of assets (other than cash and securities) of $100,000, listing on a recognised exchange or having reasonable yearly expenditure. These companies, according to the budget proposal, will have to meet any two of these additional substance conditions.Prime Minister Pravind Jugnauth (who also holds the finance ministry portfolio) has proposed in his budget speech on June 8 to strengthen the ‘substance’ norms for entities operating under Category 1, Global Business Licence. These entities are referred to as GBC-1 companies.

Foreign portfolio investors (FPIs), offshore funds and other entities that invest in India via the Mauritius route will now have to satisfy any two of the secondary (or additional) substance conditions instead of just one to prove they have adequate commercial substance in Mauritius and are not just shell companies or post-box entities (see graphic).

Mauritius-based entities engaged in investment activities typically opt for a GBC-1 licence as this enables them to take advantage of tax treaties entered into by Mauritius. A major chunk of India’s foreign direct investments (FDI) flow in from such companies. During 2016-17, Mauritius was the top source of FDI into India, with inflows of Rs 1,05,587 crore (or 33% of total inflows). GBC-1 companies were always required to be ‘controlled and managed’ in Mauritius.

For this, they were mandatorily required to have at least two Mauritius-resident directors who had relevant qualification and experience and were actively involved in the control and management of the company, the principal bank account was to be in Mauritius, and accounts were required to be kept and audited in Mauritius.

Subsequently, the Financial Services Commission in Mauritius required GBC-1 companies to meet by January 1, 2015 any one of the additional substance conditions — an office in Mauritius, an administrative full-time employee, resolution of disputes arising out of the constitution of the company (akin to the Memorandum and Articles of Association under Indian law) via arbitration, holding of assets (other than cash and securities) of $100,000, listing on a recognised exchange or having reasonable yearly expenditure. These companies, according to the budget proposal, will have to meet any two of these additional substance conditions.

India and ASEAN observed 25 years of their Dialogue Partnership, 15 years of Summit Level interaction and 5 years of Strategic Partnership throughout 2017 by undertaking a wide range of activities, both in India and through India’s Missions in ASEAN member States, which culminated in a Commemorative Summit on the theme “Shared Values, Common Destiny” on 25 January 2018.

Posted by Sourish Mohan Mitra

Sourish Mohan Mitra is an India-qualified lawyer from Symbiosis Law School, Pune and currently working as an in-house counsel with a global research firm in Delhi, India; views expressed are personal; he can be reached at sourish24x7@gmail.com; Twitter: @sourish247

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