As most are already aware, foreign direct invest (“FDI”) into certain sectors are regulated. Under the extant foreign direct investment policy of the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (“FDI Policy”) up to 100 % FDI into some sectors is permissible without any government approval (“Automatic Route”) while others either require approval from the relevant ministry of the Government (“Approval Route”) or the percentage of FDI in a certain sector is restricted.
As a non-resident investor, the preference is to invest in sectors under which FDI is permitted under the Automatic Route. However, is it fairly conceivable (or rather highly likely) that apart from its main business (which would be under the Automatic Route) a company would need to engage in some ancillary business that augments the main business, and such ancillary business is not necessarily under the Automatic Route.
The most common example of this overlap is in the healthcare sector. Owning and management of a hospital would broadly be classified as being under the Automatic Route , but what if the hospital in question also owns and manages a pharmacy? Technically and typically, owning and managing a pharmacy would be categorized as ‘Multi Brand Retail Trading’, a sector in which only 51% FDI is permitted under the Approval Route .
Another instance includes the food and beverage sector,viz., would a restaurant chain (that predominantly prepares, technical term being ‘manufactures’ food) be deemed to be engaging in retail trading on account of selling packaged mineral water and other aerated drinks?
Also, when the following entities;
(a) companies engaged in the business of leasing / renting consumer durables like furniture or appliances ;
(b) cab aggregators who own the vehicles in question;or (c) a service providers who also happen to sell the hardware required to host the service they are providing; finally dispose of the appliance, consumable, vehicle or hardware in question (at the end of the lifetime of the appliance, consumable, vehicle or hardware); would these entities be deemed to be engaging in trading activities?
The answer to some of the questions posed above lies in answers to these questions:
1. Is the ancillary being undertaken pure “coincidentally”?
2. Is the ancillary business being undertaken under the garb of running the main business?
If the answer to first question is in the affirmative and the answer to the second is in the negative, then the business should be kosher as far the FDI Policy is concerned. However, it’s the answer to these questions that is a little more complicated and requires delving into very specific facts of each case.
One common factor to be considered across sectors would be what percentage of the entity’s turnover or profit comes from the ancillary business. A company should be able to substantiate that the revenue and/or profit coming from the ancillary business is negligible in comparison to main business.
Then there are case specific instances. For example, in the instance of the hospital, in addition to the ‘turnover / profits’parameter referred to above, if a hospital can substantiate that the pharmacy only (or predominantly) sells medicines to its patients, it would further make the case for the pharmacy business being purely ancillary to the main business, i.e., that of running the hospital itself.
Similarly, in the furniture and appliances instance if the company has sold the inventory in question at a highly depreciated value, this may also serve as evidence of the sale being purely ancillary.
‘Necessity’ may also serve as a justification for undertaking the ancillary business. To again quote the instance of the hospital, it is a fairly accepted industry view that a pharmacy is a necessity to run and manage a hospital. Similarly, an educational institute would be hard pressed to provide educational services without selling books.
Safe to say, that interpreting the FDI Policy requires some detailed analysis and deep dive into the nuances of a company’s business.
While the questions raised above will eventually lead to a “yes” or “no” answer, the steps to reach such conclusions depends largely on the analysis of the business case itself.
However, some of the factors that we have brought out can be applied to enable one to reach these answers, hopefully, with some clarity, such as:
• whether, the ancillary business is, in fact, ancillary? That is does it exist merely coincidentally to enable the running of the main business or is it a business in itself?
• whether the revenues / profits from the ancillary business are comparable or negligible to the main business?
• whether the ancillary business is “necessary” for the efficient operating of the main business?
Of course, while these questions are good starting points to evaluate the “non-Automatic Route” businesses of the Automatic Route business, there are by no means conclusive. A more specific analysis and conclusion can only be arrived at based on analysis of the specific business case.
Jeevith Belliappa is an Associate Partner in the corporate transactions team (email@example.com)
The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“FEMA Rules”) makes a reference to ‘hospitals’ under the sector of ‘Construction Development: Townships, Housing, Built-up infrastructure’. This sector has certain additional conditions that will need to be adhered to.
Paragraph 15.4 of the FEMA Rules prescribes the conditions for Multi Brand Retail Trading.
Whether the business model constitutes a financial lease or an operational lease would require an altogether difference analysis (and is not the subject matter of this article).
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The material contained in this alert is for informational purposes only. The views expressed are not those of K Law and do not constitute legal advice. K Law disclaims all liability to any person or entity for any loss or damage caused by errors or omissions in this alert. This article was authorized by Jeevith Belliappa (Associate Partner).
The material contained in this article is for informational purposes only. The views expressed are personal and do not constitute legal advice. K Law disclaims all liability to any person or entity for any loss or damage caused by errors or omissions in this article.