Technology Law AnalysisMarch 15, 2024 Boost to India’s Space Potential: India Liberalizes Foreign Direct Investment - Part II
INTRODUCTIONThe Union Cabinet had proposed amendments to the Foreign Direct Investment (“FDI”) policy liberalizing the foreign investment in the space sector (“FDI Space Policy”) by way of a press release dated February 21, 2024 (“Cabinet Press Release")1. The Ministry of Commerce and Industry has now notified the said amendments to the FDI Space Policy on March 05, 20242 (“MCI Notification”). However, the same is not enforceable as a law as the formal enforcement is still awaited. The Cabinet Press Release provided a generic framework of the proposed FDI norms in the space sector, and the MCI Notification attempts to pen down definitions / explanations for the terms used in the Cabinet Press Release, thus limiting the scope of ambiguity and industry interpretations. The amended regime will come into force only upon notification of the amendments to Schedule I of Foreign Exchange Management Act (Non-Debt Instrument) Rules, 2019 (“NDI Rules”). The MCI Notification provides the language which will be inserted into the NDI Rules, and also provides much needed clarity to the stakeholders / industry players before the regime actually comes into force. For our detailed analysis of the Cabinet Press Release, please visit here. FDI Space Policy - Thresholds The thresholds for permissible FDI in each sector / activity within the space sector notified via the MCI Notification3 are:
BREAKING DOWN THE FDI SPACE POLICY(i) Requirement to comply with sectoral guidelines: The MCI Notification clarifies that the investee entity in any of the above sectors will be subject to sectoral guidelines which may be issued by the Department of Space. Even though the government intends to reduce overall regulatory control in the sector, given the sensitivity involved, they seem to believe that it is pertinent that the Department of Space retains power to provide additional compliance requirements for foreign investments wherever required.4 (ii) Clarity on the term “Satellites-manufacturing & operation” 5 The MCI Notification has provided explanation of the term “satellites – manufacturing & operation”, which means end-to-end manufacturing and supply of satellite and/or payload, establishing the satellite systems including control of in-orbit operations of the satellite & payloads. In layman terms, a satellite encompasses the entirety of a spacecraft designed to orbit the Earth. In contrast, the payload refers to the specialized equipment carried onboard the satellite to fulfill its designated mission objective. This equipment could encompass scientific instruments, communication devices, or any other apparatus crucial for the mission's success. The MCI Notification explicitly clarifies inclusion of payloads. However, it does not explicitly mention inclusion of manufacturing and operation of spacecrafts (which sometimes may not be categorized as satellites). (iii) Definition of “Satellite data products” 6 Upon publication of Cabinet Press Release, the industry stakeholders questioned the rationale for bringing “Satellite data products” under the purview of space sector, when these can be more appropriately regulated under the Geospatial Guidelines, 2021 (“Geospatial Guidelines”). While the rationale is still not clear, MCI Notification has provided a definition of the “Satellite data products” as reception, generation or dissemination of earth observation/remote sensing satellite data and data products including Application Interfaces (API). However, the proposed FDI norms for “Satellite data products” may still conflict with the 100% FDI under the automatic route permitted under the Geospatial Guidelines for select category of data products which could also include terrestrial satellite data. (iv) Launch Vehicles and Associates Systems or Sub-systems7 This category has been explained to includea vehicle and its stages or components that is designed to operate in or place spacecraft with payloads or persons, in a suborbital trajectory, earth orbit or outer space. A launch vehicle is crucial for deploying satellites and other payloads into space. They require their own dedicated infrastructure and support systems during the launch process, such as facilities equipped with launch pads, fueling systems, and launch control centers, tracking, monitoring and controlling facilities. Post release of Cabinet Press Release, the industry had doubts vis-à-vis treatment of infrastructure and support systems for Launch Vehicles and their sub-components. With the explanation provided, it seems all that these will be covered under Category 2 i.e., under the 49% automatic route, and beyond 49% percent under the government route category. (v) Manufacturing of Components and Systems/Subsystems for Satellites, ground segment and user segment8 This category comprises the manufacturing and supply of the electrical, electronic and mechanical components systems/ subsystems for satellites, ground segment and user segment. Any investments in activities under this category will be covered under Category 3, i.e., under the 100% automatic route. The explanations provided for this category and “Satellites – Manufacturing & Operation” i.e., Category 1 seems mildly repetitive to the extent both includes satellite systems. The legislative intent seems to be those non-sensitive systems (which are electrical, electronic and mechanical in nature) are intended to be included in Category 3, whereas more sensitive and larger systems are intended to be included in Category 1. (vi) Overlapping activities In case an entity is engaged in activities belonging to two difference categories – say:
then it will need to restrict its foreign investments to a stricter category threshold i.e. Category 2. Alternatively, such an entity may consider demerging and operating the business under two separate legal entities. In India, it is also typical for companies to have a broad and all-encompassing explanation of its “business activity” under its charter documents. Space companies should carefully review their charter documents to see if any of the activities mentioned therein falls beyond their actual scope of work and particularly if the activities mentioned therein overlap with stricter category given under the new FDI regime. In such a case, the entities may consider amending their charter documents as well. (vii) Grandfathering Existing Investments The existing FDI policy did not include space sector related activities (other than satellites-establishment and operation) such as launch vehicle business, ground segment, user segment, sub-component / sub-systems manufacturing, data products etc. Various stakeholders argued that since the existing FDI policy did not specify certain activities such as launch vehicles, data sets, manufacturing of space systems / components etc. under the head of “satellites-establishment and operation”, foreign investments in such cases should be permitted up to 100% under the automatic route. This was based on the interpretation under the FDI policy that sectors / activities not specifically listed or prohibited, are permissible for foreign investment up to 100% under the automatic route, subject to sectoral conditionalities. Relying on the same, foreign investors made investments in space start-ups whose activities were not explicitly listed or regulated under the current FDI regime without obtaining government approval. Some stakeholders interpreted “satellites” very broadly and took a more conservative view that all space related activities required government approval. Similarly, there were overlaps in activities / interpretation of the FDI policy under the sectors of defence, telecom and manufacturing. The space liberalization norms under the proposed FDI Space Policy may have actually de-liberalized this sector for certain companies who received investments in allied space activities based on the understanding that sectors / activities not specifically listed or prohibited, should be eligible for foreign investments up to 100% under the automatic route. In such cases where the investment thresholds under the proposed FDI Space Policy may be breached, it would be interesting to see the government’s approach including granting approvals on a post-facto basis. (viii) Some Other Definitions / Explanations:
(ix) Focus on Upstream space sector: Globally, space sector activities are primarily divided in three segments:
The new FDI regime seems to focus more on upstream activities. Upstream ventures typically struggle to attract funding primarily due to its capital-intensive nature and longer payback periods. The new FDI regime aims to improve financial access for such upstream ventures. The development of downstream sector and auxiliary sector substantially depends on growth of upstream space sector.12 (x) Predictions regarding inclusion of Satellite Broadband Services The terms used in Category 1 i.e., ‘Satellites-manufacturing & operation’, ‘Satellite data products’ and ‘Ground & User Segment’ along with their explanations has kicked in additional contemplations amongst the stakeholders. The industry is predicting that since the explanation of these terms do not specifically cover ‘satellite broadband services’, government might classify these under the Telecom sector, allowing 100% FDI under the automatic route for global satellite broadband players. However, this view may still evolve basis industry feedback / representations.13 CONCLUSIONWhile FDI liberalization in the space sector is a positive move, the evolving space sector demands continuous monitoring and adjustments from the government to ensure responsible growth. The government seems to be adding more and more clarity with each of its press release / notification for the stakeholders. This transparency, coupled with future clarity, paves the way for exciting advancements in Indian space exploration and in turn, encourage more foreign investments in the country.
You can direct your queries or comments to the authors. 1Press Release, Ministry of Commerce & Industry, available at https://pib.gov.in/PressReleasePage.aspx?PRID=2007876 2Notification, Ministry of Commerce & Industry, available at https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2011523 3Para 5.2.12.1 – 5.2.12.3 of the FDI Policy 45.2.12.4 of the FDI Policy 55.2.12.5 (1) of the FDI Policy 65.2.12.5 (2) of the FDI Policy 75.2.12.5 (4) of the FDI Policy 85.2.12.5 (6) of the FDI Policy 95.2.12.5 (3)(a) of the FDI Policy 105.2.12.5 (3)(b) of the FDI Policy 115.2.12.5 (5) of the FDI Policy DisclaimerThe contents of this hotline should not be construed as legal opinion. View detailed disclaimer. |
|