Government Notifies FDI Policy For Digital News And Contract Manufacturing. Confusion Persists

The Ministry of Commerce today notified the fine print of policy changes to foreign direct investment in digital news, contract manufacturing, single brand retail and coal mining.

Prescribing a 26 percent cap for FDI in digital news under approval route is a regressive step and the lack of distinction between content creators and aggregators has made matters worse, experts told BloombergQuint. The move to allow brand owners to sell their products offline and online via contract manufacturing is a backdoor entry for multi-brand retail and should’ve ideally come with some checks and balances, they said.

Digital News Media: Policy Scarce On Details

Last month, the government had announced that 26 percent FDI will be allowed under government approval in entities engaged in uploading, streaming of news and current affairs. This was in line with the FDI policy for print media, the government had said.

At that time, experts had raised several concerns:

• What happens to existing structures where the foreign partner is above 26 percent?
• Will the 26 percent limit apply to news aggregators as well or only content creators?
• Will social media platforms like YouTube, Twitter and Facebook—that allow for uploading of news and current affairs—be subjected to the 26 percent limit or will this threshold apply to only those who are uploading, disseminating news and current affairs via such platforms?

Unfortunately, the commerce ministry’s press note doesn’t answer any of these and is thin on details.

We had hoped for more flesh and colour in the press note but the government has pretty much retained the same language as the press release, Vaibhav Kakkar, partner at L&L Partners, said.

This may create serious disruptions for the companies which have received more than 26 percent FDI as generally the market view was that the sector is unregulated. Companies which already have FDI over 26 percent technically may not be required to unravel their structures as the notification would apply prospectively, Kakkar said.

But Vivek Gupta, partner at KPMG India, disagreed. He said that there is uncertainty around how existing structures may be impacted and it’s unlikely that they will be grandfathered.

The second issue relates to news aggregators which, unless the ministry clarifies, will be subject to the same 26 percent limit as content creators.

Ideally, the limit should have only applied to content creators because aggregators are just like distributors of broadcast media, experts pointed out. In broadcasting infrastructure services, FDI of up to 74 percent is permitted.

Gupta said that post the initial announcement, industry had argued that the government should clarify that this foreign investment cap will apply only to those entities that generate or publish news content and not to pure intermediaries or aggregators.

Finally, what will be the fate of social media platforms like Facebook, YouTube and Twitter?

It is likely that this policy would not affect the social media platforms since these entities are merely technological platforms, Kakkar said. The actual content or digital news is provided by other entities and so, the restriction would apply to relevant entities that are uploading content or news on these social media platforms, he said.

Gupta disagreed, and added that if an extreme literal interpretation is taken, even those pure social media platforms who technically upload or stream, could be interpreted to be covered, although that is perhaps not the intent.

Contract Manufacturing: Back Door Entry For Multi-Brand Retail?

For FDI policy in contract manufacturing, too, the press note has retained the language of the announcement made in August.

This will allow foreign brand owners to do contract manufacturing themselves, through third parties, group companies etc, and more importantly goods so produced can be sold both online and offline by them, Paresh Parekh, partner at EY India, said. A single contract manufacturer can cater to multiple brands but generally they are exclusive, he pointed out.

While the policy is a game changer for for foreign brands, the government should have added some checks and balances, a lawyer who advises companies on FDI policy, told BloombergQuint, requesting anonymity.

For instance, they have should’ve added that mere outsourcing to an existing contract manufacturer won’t be allowed. The policy should’ve ensured that a foreign brand adds to the manufacturing capacity in India and doesn’t merely rely on an existing plant of a third party. Now, a very loose contract manufacturing arrangement is possible where someone makes the product end-to-end, and the foreign brand just sells it, this lawyer added.