Foreign Direct Investment in Digital News – Clearing the Air
In September 2019, the Indian Department for Promotion of Industry and Internal Trade (“DPIIT”) released a press note bringing entities engaged in the news digital media sector within the folds of the foreign direct investment (“FDI”) regime in India (“Press Note”).
As per the Press Note, up to 26% FDI would be allowed in entities operating in the digital news media space through the approval route, however, the Press Note lacked clarity and did not elaborate on the scope and ambit of “digital media”. For instance, it was not clear whether digital news aggregators or online intermediaries would be covered by the new FDI condition.
The DPIIT has issued a clarification on October 16, 2020 to address the confusion surrounding the Press Note and also, prescribe additional conditions on FDI in this sector (“Clarification”).
By way of the Clarification, the DPIIT has identified the following categories of entities (registered or located in India) as entities that would be covered by the 26% FDI restriction:
Digital media entity streaming/uploading news and current affairs on websites, apps or other platforms;
News agency which gathers, writes and distributes/transmits news, directly or indirectly, to digital media entities and/or news aggregators; and
News aggregators, being an entity which, using software or web application, aggregates news content from various sources, such as news websites, blogs, podcasts, video blogs, user submitted links, etc. in one location.
The DPIIT also imposed the following additional compliances on these entities:
Majority of the directors and CEO of the entity should be Indian citizens; and
Security clearances will need to be obtained for any foreign personnel to be deployed with the entity for more than 60 (sixty) days in a year (by way of appointment, contract, consultancy or otherwise).
The next year: The entities are required to comply with the prescribed FDI cap by October 15, 2021. Given the tight timelines for compliance, there is likely to be a scramble for investors, hastened due diligence processes and possibly, some fire sales in the coming months. Entities may even be forced to consider buy back or capital reduction proceedings in an effort to meet the FDI cap. An entity that is unable to shed its foreign investment to the prescribed limit will fall foul of the regime and will need to approach the Reserve Bank of India for compounding the offence. It is difficult to predict whether the regulator will take a heavy handed or lenient approach in prescribing penalties, if any, for the non-compliance at year end.
Operational hurdles: As per the Clarification, primary compliance responsibility is on the ‘investee entity’, however, the prescribed compliances also present hurdles for the foreign investor. For instance,
Foreign investors will be unable to have a common board of directors across all their group entities, a practice that is common to ensure operational ease and control within the group.
Once security clearance for any personnel is denied, such personnel cannot continue to be associated with the entity, causing added complications in recruitment processes.
As new consumption patterns emerge (with a notable shift to online news consumption over traditional print means), new conditions aimed to monitor foreign influence in this sensitive sector were expected. Unfortunately, the burden of compliance may likely be a deterrent to FDI in websites and Apps, a space that has held great potential for bring in FDI so far.
Given there are still certain ambiguities (specially, around the “location” debate), entities in the news digital media space will be looking at possible work-arounds, such as, offshore upload of news content or a defence that digital news is not the main source of business for the entity, in the coming days. It is to be seen whether these structures will fly under the regulatory radar or be possible to implement by the entities.