In a major boost to electronic giants, SEZs clear local sourcing test

In a major boost to consumer electronic giants like Apple and Xiaomi, the government has relaxed the local sourcing norms. Issuing a clarification, the Department for Promotion of Industry and Internal Trade (DPIIT) on Wednesday said, foreign retailers can now meet their local sourcing requirements by buying goods produced in units based in Special Economic Zones (SEZs).

While 100 per cent foreign direct investment (FDI) is allowed in single-brand retail, if the foreign investment exceeds 51 per cent, the 30 per cent mandatory local sourcing norm kicks in.

“As regards, sourcing of goods from units located in SEZs in India, it may be clarified that sourcing of goods from such units would qualify as sourcing from India for the purpose of 30 per cent mandatory sourcing from India for proposals involving FDI beyond 51 per cent, subject to SEZ Act, 2005,” DPIIT said in the clarification.

This is seen as a move to further entice original equipment manufacturers (OEMs), especially for the mobile phone industry. Taiwanese OEMs such as Wistron and Foxconn, who supply to tech giant Apple are expected to benefit.

Electronics major Apple that is willing to set up its flagship Apple Stores here, has long been struggling to meet the local sourcing norms. With its key manufacturing partners – Foxconn & Wistron – having their India facilities located in SEZs, the relaxation will boost its fortunes. Currently, it procures iPhone XR from Foxconn’s Tamil Nadu plant, while Wistron assembles iPhone 7 from Bengaluru.

Others like Xiaomi & Oppo — both are working to expand their branded offline store networks — source from Foxconn.

The SEZ sourcing issue was not clearly defined earlier and the industry had argued that the government was considering SEZ procurement made by retailers on a case-by-case basis, a senior functionary of the Federation of Indian Export Organisations, said. The DPIIT clarification has laid the matter to rest.

In August last year, the government had agreed to a long-standing industry demand to make things easier for foreign retailers. With the change, purchases made by foreign retailers for export purposes were allowed to be factored in to meet the 30 per cent domestic sourcing norm. Companies in the single-brand space were also allowed to start online retailing without opening brick-and-mortar stores first, something that was not allowed earlier.

After continuing to push for an exemption from the minimum alternate tax, SEZ developers have continued to clamour for more reforms, arguing that the provisions make SEZs unfavorable in terms of investment. This has resulted in only 234 of the 370 notified SEZs being operational, according to official statistics. The commerce department has also said that many SEZs are operating at sub-par levels with the number of current units being much lower than the original expectation.

The commerce department has again floated the idea that duties be reduced when goods are cleared by SEZs to domestic areas, considering that these goods could be imported through the free trade agreement (FTA) route at nil rate, sources said.

Govt examining foreign fund flows in infra, telecom at sensitive locations

The government has initiated review of foreign fund flows in sensitive sectors like telecom and physical infrastructure at strategic locations of the country, according to sources.

A comprehensive review has been undertaken to assess the control over various infrastructures at strategic locations and border areas of the country, the sources said.

Given the fact that majority of the industries are now under automatic route for foreign direct investment (FDI) rather than the approval route, the sources said, it is required to have an idea on the foreign presence in these areas including the northeastern region.

Keeping in view the strategic importance, the sources said, the government decided against closure of Bharat Sanchar Nigam Ltd. The state-owned telecom company has a strong network at border areas.

Many departments and agencies, including the Reserve Bank of India (RBI), have been involved in the exercise.

The RBI is also examining the need for greater scrutiny of the FDI coming through the automatic route where companies are only required to inform the regulator about the fund flow within a stipulated time.

Most countries do not allow foreign players to participate in strategic infrastructure projects.

Recently, Commerce and Industry Minister Piyush Goyal said any country discriminating against Indian companies in the award of contracts would not be allowed to participate in public procurement contracts.

"When we took the stand not to be a part of RCEP (Regional Comprehensive Economic Partnership), one of the major stumbling blocks was also the fact that our businesses in the areas of our strength do not get an equal and fair opportunity when it comes to engaging with contracts or businesses in other geographies," he had said.

The minister also said he had not heard that China ever opens up any of its government contracts.

"They (China) are never opened up for international competition in the garb of being public procurement. In many other ASEAN (Association of Southeast Asian Nations) countries, even Japan and South Korea, the kind of conditionalities that they put don't allow too many of our companies to participate in tenders in those countries," he said.

FDI grows 28% to $16.33 bn in Q1 FY20; Singapore largest source: Govt data

Foreign direct investment into India grew by 28 per cent to $16.33 billion during the first quarter of the current fiscal, according to government data.

Inflow of foreign direct investment (FDI) during April-June of 2018-19 stood at 12.75 billion.

Sectors which attracted maximum foreign inflows during April-June 2019-20 include services ($2.8 billion), computer software and hardware ($2.24 billion), telecommunications ($4.22 billion), and trading ($1.13 billion), the commerce and industry ministry data showed.

Singapore emerged as the largest source of FDI in India during the first quarter of the fiscal with $5.33 billion investments. It was followed by Mauritius ($4.67 billion), the US ($1.45 billion), the Netherlands ($1.35 billion), and Japan ($472 million).

FDI is important as the country requires major investments to overhaul its infrastructure sector to boost growth.

Recently, the government relaxed foreign investment norms in sectors such as single-brand retail trading, coal mining and contract manufacturing.

FDI norms eased for single brand retail, digital media, manufacturing

The Union Cabinet on Wednesday relaxed the rules for single-brand retail, more than seven years after the foreign investment cap was removed for the segment to attract marquee foreign brands such as Gucci, Louis Vuitton, Ikea and others into the country. The latest government move is in line with the recent Budget announcements on FDI changes.

While 30 per cent local sourcing remains a mandatory condition for single-brand retail, the government has now agreed to a long-standing industry demand to make things easier for foreign retailers. With the change, foreign retailers’ India buy for exports will be factored in to meet the 30 per cent domestic sourcing norm. Companies in the single-brand space can also start online retailing without opening brick-and-mortar stores first, something that was not allowed earlier. While 100 per cent FDI is allowed in single-brand retail, whenever the foreign investment exceeds 51 per cent, the mandatory local sourcing norm kicks in.

It was not immediately clear whether the new rules would enable Apple to open fully-owned stores in India or not. Most analysts were optimistic about the Tim Cook-led American major making an entry after the latest rule change. But, others such as Arvind Singhal, chairman of Technopak Advisors, argued manufacturers like Foxconn, which make products for Apple, may not be able to comply with the sourcing norms even after the relaxation. Foxconn’s sourcing from India is believed to be marginal for the export market unlike in the case of chains like Ikea and H&M.

Foreign companies including Ikea, which brought the first big piece of FDI in single-brand retail, see the latest Cabinet decision as a positive. Welcoming the move, Swedish furniture major Ikea, which had committed Euro 1.5 billion investment in the country in 2012, said in a statement that the company was committed to increase local sourcing from India.

Besides single-brand retail, the Cabinet allowed 100 per cent FDI under automatic route in contract manufacturing and commercial coal mining and related processing infrastructure. Sourcing for contract manufacturing will also be counted towards total sourcing commitments.

Also, for the first time, the government has set an FDI cap at 26 per cent for digital news media, which till now was not covered under any foreign investment rules. Digital media companies with more than 26 per cent FDI will now be required to bring down their foreign equity level.

Officials said they would start a case by case assessment of organisations that have already hit the cap.

“There’s a slowdown in the FDI situation worldwide. Even in this situation, we hope India maintains its pre-eminent position after these announcements,” Commerce and Industry Minister Piyush Goyal said while briefing the media in New Delhi after the Cabinet meeting.

Investors now want to open manufacturing centers globally, Goyal said. ‘’They are looking at India to make products for the Indian markets as well as for exports. We have till now focused on those that retail in India, but the country gets a double advantage when investors export from India.’’

As for the single-brand decision, the Department for Promotion of Industry and Internal Trade (DPIIT), the nodal body for investment-related policy, will now also count local sourcing in phases. It will be counted as an average of the total value of the goods purchased by a retailer in the first five years in a single block. After that, the sourcing norms will kick in annually.

“Single brand reforms will have a long-lasting impact in boosting market hygiene, enhancing customer satisfaction and most importantly raising mobile handset retail to international standards. Iconic stores of global standards have a symbolic value for the nation too”, said Pankaj Mohindroo, of India Cellular And Electronic Association.

For coal mining, so far 100 per cent FDI under automatic route was only allowed for captive coal production. It has now been decided to permit 100 per cent FDI for not just commercial coal mining but for associated processing infrastructure as well, including coal washery, crushing, coal handling, and separation.

“Given climate change related challenges, consumption of coal is in decline in OECD countries and even in China. Fresh investment in coal sector from global mining majors, is quite challenging going forward,” said Debashis Mishra, leader, energy, resources and industrials, Deloitte India.

“Sub-scale size of mines, challenges relating to land acquisition and getting statutory clearances, law and order challenges in coal belt will also be factors considered by large foreign players before deciding to invest in Indian coal sector,” Mishra said.

Govt looks at eliminating FDI security gaps through scrutiny measures

Concerned over rising foreign direct investment (FDI) inflows into strategic sectors like telecom as well as information technology (IT) and IT-enabled Services (ITeS) through the automatic route, the government is considering eliminating the security gaps through a stringent scrutiny mechanism.

The Department for Promotion of Industry and Internal Trade (DPIIT) has proposed an online filing of advance foreign investment returns on the Foreign Investment Facilitation Portal (FIFP), which will be accessible to the Reserve Bank of India (RBI), the Ministry of Home Affairs and other security agencies.

The government is worried that a transfer of data from India, through IT investment, may threaten national security. Besides, it has been observed that very little information comes to the government from FDI flowing through the automatic route.

“There has been a rise in investment coming into strategic sectors. Besides, 100 per cent FDI is allowed in the IT/ITeS sectors under the automatic route. This leads to a transfer of personal data of Indian citizens, which may be exploited in a manner that threatens government security,” said an official. FDI is permitted up to sector-specific limits under the automatic or approval route. “The FIFP could be linked to the RBI’s foreign investment reporting and management system portal, where all foreign investors will be required to provide information. In case of no objection, the FDI proposal will be through the automatic or approval route,” said another official. He added that if an objection was raised, the interministerial committee headed by

Govt looks at eliminating FDI security gaps through scrutiny measures DPIIT secretary would look into it. If no objection is raised in 30 days, the proposal will be processed via the automatic or approval route. If transaction has already taken place, it will need to be withdrawn in the case of an objection. Currently, FDI proposals are processed through a standard operating procedure by the DPIIT, where a time period of 8-10 weeks has been fixed for decision making. Further, to ensure timely disposal of FDI proposals, a periodic review is undertaken by the DPIIT with other stakeholder ministries and departments. Also, the home ministry lays down guidelines for the assessment of proposals from national security point of view.

DPIIT says FDI flow into Tamil Nadu declines 25%, state refutes data

Foreign Direct Investment (FDI) inflow into Tamil Nadu, including Puducherry, dropped by 25 per cent in FY19 to $2.61 billion, from $3.48 billion a year ago, Department for Promotion of Industry and Internal Trade (DPIIT) data revealed. State government officials explained the drop in FDI, citing similar trends in other manufacturing states such as Karnataka, Gujarat and Maharashtra.

Tamil Nadu's main competitor in South India, Telangana's FDI increased to $3.46 billion (Rs 23,882 crore) in FY19 from $1.25 billion (Rs 8,037 crore) in 2018-2019. FDI inflow into Karnataka dipped to $6.72 billion (Rs 46,963 crore), from $8.57 billion (Rs 55,334 crore) a year ago

Investor-friendly policies of other domains and governance problems in Tamil Nadu may have kept investors away from the state, CARE Ratings said.

Government officials, while refuting the data, claimed that enactment of Tamil Nadu Business Facilitiation Act improved ease of doing business and that the state had signed MoUs worth Rs 3 trillion in FY19. They pointed out that some of the other frontrunners in industrial investment have also seen drop in FDI.

Maharashtra showed a decline of 15 per cent in foreign equity inflow to $11.38 billion (Rs 80,013 crore) ibn FY19 from $13.42 billion (Rs 86,244 crore) a year ago, FDI Into the Ahmedabad region covering Gujarat declined by 16.1 per cent to $1.80 billion (Rs 12,618 crore) from $2.09 billion (Rs 13,457 crore).

"FDI flow is project-specific and also depends on the mix of foreign and local funding. So FDI data of one particular year is not sufficient to read the investment trends. One needs to see a longer period like five years to know the overall preference of foreign investors," said a senior official from Tamil Nadu government. Tamil Nadu is a manufacturing state and FDI in manufacturing is showing an overall decline in the country. India's FDI growth is driven by services, he explained.

Overall FDI inflow declined to $44.37 billion (Rs 309,867 crore) in 2018-2019 from $44.86 billion in the previous year (Rs 288,889 crore) , said the official.

While Tamil Nadu has a large share of FDI, some inflows are accounted in Mumbai or Delhi where the headquarters of financial, insurance and banking companies are located. For instance, French automobile firm PSA Automobiles and Avtech Powertrain Pvt Ltd are investing $2.91 million and $33.23 million respectively for manufacturing of auto components and passenger cars in Tamilnadu, but are listed under New Delhi, since its corporate office location is in Delhi, while the component manufacturing project is coming up in Hosur and the car manufacturing unit is coming up in Tiruvallur.

"While FDI in manufacturing is increasing, the rate of growth in 2018-19 has been very high in services. Tamil Nadu is at a disadvantage in this regard," said the official.

Besides, it would not be proper to compare Tamil Nadu with and other regions, since Andhra and Telengana are jointly accounted and New Delhi region consists of a larger Capital region (Part of Uttar Pradesh and Haryana together). Tamil Nadu's manufacturing FDI will grow if the Global Investors Meet (GIM) projects take off in the next three years, added the government sources. Foreign investments can also come in as lending and so it depends on each projects financial structure, added the officials.