The Viewpoint: Analysis of FDI in Digital Media in the Light of Recent Updates and Clarification

In light of the clarification issued by the DPIIT, the piece details out the concerns and ambiguities amongst the concerned stakeholders.
Archana Khosla Burman, Vishal Vora, Sohini Mandal
Archana Khosla Burman, Vishal Vora, Sohini Mandal

Foreign Direct Investment (FDI) is regulated in India vide the Foreign Exchange Management Act, 1999 (FEMA) and the rules and regulations prescribed thereunder including the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules).

The Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Consolidated FDI Policy Circulars/Press Notes/Press Releases which are notified by the Department of Economic Affairs (DEA), Ministry of Finance, Government of India as amendments to the NDI Rules under the FEMA.

The NDI Rules prescribe the entry routes and sectoral caps for FDI in an Indian entity in various sectors. On September 18, 2019, the Press Note No.4 (2019 Series) detailing the amendments to the consolidated FDI policy (Press Note) was issued by the DPIIT which allowed up to 26% FDI in uploading and streaming of news and current affairs through digital media subject to Government approval (FDI Limit) and other conditions imposed on entities having foreign investment in print media sector.

The changes introduced by the Press Note were notified under the NDI Rules on December 05, 2019 (Notification). It is important to note that prior to this, the relevant FDI sectoral cap was applicable for uploading and streaming of news and current affairs only, without any specific reference to digital media, which provided the necessary flexibility for new-age digital media platforms to circulate information online, without any sectoral threshold or restriction.

Therefore, the Press Note and the Notification came across somewhat as a dampener for the digital media sector. However, the Press Note and the NDI Rules did not provide details regarding what kind of entities would fall under the category ‘Digital Media’. Further, the Press Note and the NDI Rules did not provide for any grace or sunset period within which digital media entities would have to comply with the revised FDI norms. Therefore, to address the concerns and ambiguities amongst the stakeholders, the DPIIT has issued a clarification on October 16, 2020 (Clarification) detailing the categories of entities that would come under the ambit of ‘digital media’.

Details of the Clarification

1. Categories of entities within the scope of Press Note: The Clarification seeks to elaborate on the construct of applicability of the FDI Limit to the following entities registered or located in India:

(i) digital media entity streaming/ uploading news and current affairs on websites, apps, and other platforms;

(ii) news agency which gathers, writes, and distributes/ transmits news, directly or indirectly, to digital media entities and/ or news aggregators; and

(iii) news aggregator, being an entity which, using software or web applications, aggregates news content from various sources, such as news websites, blogs, podcasts, video blogs, user-submitted links etc. in one location.

2. Time period for compliance: The Clarification provides that all the entities covered within the scope of the Press Note must align with the FDI Limit within 1 (one) year from the date of issue of the Clarification.

3. Additional conditionalities: The Clarification further sets out the following conditions that every digital media company which has received FDI must additionally comply with:

(i) The majority of directors on the board of the investee company must be Indian citizens;

(ii) The chief executive officer of the investee company should be an Indian citizen;

(iii) Prior security clearance is required for any foreign personnel likely to be engaged by the investee entity for more than 60 (sixty) days, by way of the appointment, contract or consultancy, or in any other capacity for functioning of the investee entity.

4. Responsibility for compliance: The Clarification confirms that compliance with the FDI restrictions and conditions will be the responsibility of the investee entities.

One of the most discussed aspects of the Clarification is with respect to what kind of entities may come under the ambit of ‘news aggregator’. The question of what ‘registered or located in India’ means under the Clarification, is ambiguous at the moment, and there has been no representation from the Government on the same. It is being argued by some that since entities like Facebook and Google derive ad revenues from their operations in India, it can be deemed that they are ‘located’ in India. As of now, there is no clarity in the ecosystem as to whether the Clarification would cover social media intermediaries where users post news content. Therefore, the Clarification may also be interpreted to include within its fold news aggregators such as Google, Facebook, and other social media platforms/websites and apps and any subsidiaries of foreign entities engaged in uploading/streaming of news and current affairs through digital media in India.

The conditions and restrictions brought by the Clarification intend to create regulatory supervision with respect to foreign influence in digital media entities involved in streaming/ uploading news and current affairs. Additional conditions pertaining to nationality of key managerial personnel and security clearance for foreign personnel are also introduced with an objective to regulate digital media in the same manner as print media and broadcasting entities involved in streaming/ uploading news and current affairs. However, it is pertinent to note that this Clarification is yet to be notified under the NDI Rules.

Nonetheless, the Clarification is expected to trigger an impetus for restructuring requirement in various entities which have businesses that may come within the scope of now clarified digital media, given that the time period of 1 (one) year for compliance starts from the date of issue of the Clarification. However, the Government certainly needs to provide more clarity on the extent to which social media or user content-based businesses may be considered to come within the ambit of ‘news aggregator’. A significant threshold driven construct, based on revenue percentage or content percentage where such revenue or content is being generated directly from news-based content, will certainly be helpful. This will also provide objective parameters that will help businesses to structure and align with the FDI Limit suitably.

Authors: Founder Partner, Archana Khosla Burman; Associate Partner, Sohini Mandal; Senior Associate, Vishal Vora

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