Vide our Latest Statutory Snapshot titled “Foreign Direct Investment in Contract Manufacturing continues to be under Approval Route” dated 02nd December, 2019 (Volume 10; Issue 10) we had stated that despite Press Note 4 (2019 Series) dated 18th September, 2019 providing for inclusion of contract manufacturing under automatic route for Foreign Direct Investment (FDI), the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (the Rules) which came into effect from 17th October, 2019 did not provide for the same.
However, vide Notification dated 05th December, 2019, the Ministry of Finance (Department of Economic Affairs) has amended the Rules vide Foreign Exchange Management (Non-Debt Instrument) (Amendment) Rules, 2019 inter alia inserted an explanation as to what constitutes manufacturing activity under Sl.No.5.1 (Manufacturing) of Schedule-I to the Rules as under:
“Manufacturing activities may be either self-manufacturing by the investee entity or contract manufacturing in India through a legally tenable contract, whether on Principal to Principal or Principal to Agent basis. Further, a manufacturer is permitted to sell his products manufactured in India through wholesale and/or retail, including through e-commerce, without Government approval.” (emphasis supplied)
Thus, with the aforesaid amendment the earlier anomaly of the Rules not including the contents of Press Note 4 (2019 Series) which recommended inter alia the inclusion of contract manufacturing under FDI has been set right. Hence, FDI is now permissible for contract manufacturing in India evidenced by a legally tenable contract on principal to principal basis or principal to agent basis.