RBI circular makes FDI investment super easy in India

 

With so much hullabaloo about the FDI prohibitions and restrictions, RBI finally seems to have rung happy bells. This recent circular of RBI can boost FDI regime in India in ways unimaginable. Yet, we find very little coverage about the same. Hardly one fourth of the startups are aware of this game changer. So, what does this circular say and why exactly is it so important? Read on to know more.  

 

 

What does the circular say?

 

This circular expressly says that any Alternate Investment Fund (AIF), as long as it is sponsored or managed by at least on Indian Sponsor/manager, would be considered as a domestic machinery. Besides, it is completely irrelevant what percentage of the fund is contributed by the Indian sponsor.

The current scenario – FDI in retaiL

 

We all know that FDI in retail is currently prohibited in India. This is a somewhat peculiar situation. Almost every next startup is an e-commerce retailing unit. Also, the biggest chunk of investment flows into Indian companies from Venture Capital Funds with foreign management. This means that the entire money that supposedly should flow into the companies is foreign funds. Hence, these funds cannot be directly channelized into the company.

So, how do companies like Flipkart get funded? Well, this is the one question that almost every startup pops up to me. The answer goes like this- these funds are circulated into the companies through backdoors. Most of these retail startups have a backend company or a foreign holding/ associate company. The VCs infuse their funds into these backend companies, who in turn channelize the same into the retail company through various routes.

These arrangements although met the end objective, made things messier.  Apart from retail, FDI is also prohibited in sectors like defense, insurance or legal services.

 

Situation post issuance of this Circular 

 

By the virtue of this circular, all that VCs need to do now is setting up an AIF with the SEBI. These AIFs would have one independent Indian sponsor/ manager. They introduce their funds into this AIF, whatever amount they wish to. The Indian manager, on the other hand also contributes his share. This can be as minimum an amount as the SEBI norms permit. This AIF, now set up, is a domestic unit and can invest in any sector whatsoever.

This indeed is a super move from the Government. Most of the restricted sectors like Retail and ecommerce have huge growth potential which needs serious fund backing. VCs provide enormous scope of funding which are often exponential to their growth. On the other hand, capital intrinsic sectors like Defense and Insurance also suffer from huge capital deficits, mainly due to the long gestation period.

It is rather peculiar that on one hand we are inviting businesses to “make in India” and at the same time closing doors to opportunities which can seriously boost the start up sector. This circular seems to have been addressing this anomaly.

This year has been sumptuous in terms of liberalization of FDI norms in the country. Earlier this year, the Govt had eased FDI norms when they exempted NRI/PIO investments from the scope of FDI. These investments, if directed towards Schedule IV activities as specified in FEMA rules are to be considered as domestic investments. We also reported on the liberalization of FDI norms in retail through our article: FDI regulations liberalised, single- brand retail companies to go ecommerce

 

All we can say is that this indeed is an appreciative end of the year gift from the Govt. Happy New  Year Startups! Indeed.

 

Read it here: https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10130&Mode=0

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