FDI in Digital Media
The PN4 was earlier perceived to be a progressive move leading to liberalisation of digital media, however PN4 Clarifications while attempting to clarify certain lacunae in PN4, have in effect added many restrictive conditions on investment in digital media entities
INTRODUCTION
The Department of Promotion of Industry and Internal Trade ("DPIIT"), Government of India ("GOI") on September 18, 2019 issued press note 4 of 2019 ("PN4") under which it had allowed FDI up to 26% in the entities engaged in uploading/ streaming of news and current affairs through digital media under the government approval route. Pursuant to the same, a corresponding amendment was made to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 ("FEMA NDI Rules") vide amendment dated December 5, 2019.
However, neither PN4 nor FEMA NDI Rules define the term 'digital media' leading to confusion in the media industry regarding the entities which fall within its scope.
Prior to PN4, no Foreign Direct Investment ("FDI") cap was mentioned for digital media entities under the FDI policy and therefore, digital media entities were deemed to be covered under the residuary Section 5.2(a) of the Consolidated FDI policy of 2017. Since it was widely assumed that 100% FDI was allowed under the automatic route under the residual entry, many entities such as online media companies, content aggregators, search engines and web portals had received FDI, which in some cases exceeded 26%. In the light of this change, such entities are now required to bring down the FDI shareholding to 26% or below. However, PN4 did not provide for any transition period or sunset period within which the digital media entities could align their shareholding to comply with the PN4. Further, PN4 did not specify any additional sector specific conditions for the digital media, which have been laid down in the PN4 Clarification (defined below) under the Summary of PN4 Clarification hereinbelow.
The media industry expressed its concerns on the applicability of the Press Note 4 and a number of representations were made by the various stakeholders to the GOI seeking clarifications. Pursuant to this, GOI (acting through DPIIT) on October 16, 2020, issued a clarification on the permitted FDI of 26% in the digital media sector under the government approval route ("PN4 Clarification").
In furtherance to the PN4 and PN4 Clarification, on November 09, 2020, the President of India issued a notification under Article 77(3) of the Constitution of India, 1949, to amend the Government of India (Allocation of Business) Rules, 1961, and thereby bestowed power to on the Information and Broadcasting Ministry ("I&B Ministry"). In light of the above, now the I&B Ministry has been empowered to issue press notes, circulars, clarifications and other forms of executive instructions to regulate the digital media and Over the Top platforms, thereby hinting at the government's intentions to regulate the digital media space.
In this note, we have analyzed the implications of the said PN4 Clarification on the entities engaged in the digital media sector.
SUMMARY OF PN4 CLARIFICATION
• Restrictions under PN4 shall be applicable to the following types of entities registered or located in India:
(a) Digital media entity streaming or uploading news and current affairs programs on their websites, apps or other platforms;
(b) News agencies which gather, write and distribute or transmit news, whether directly or indirectly, to digital media entities and/or news aggregators; and
(c) News aggregators, which use software or web applications, that aggregates news content from various sources such as news websites, blogs, podcasts, video blogs, user submitted links, etc., in one location.
• Sunset/transition period of one year from the date of issue of PN4 Clarification (i.e. by October 16, 2021) for digital media entities to comply with the cap of 26% FDI as prescribed in PN4 for the digital media entities.
• Other conditions:
- Majority of the Board of Directors and the chief executive officer of the investee company should be Indian citizens; and
- The investee company is required to obtain 'security clearance' of all foreign personnel likely to be deployed for more than 60 days in a year by way of appointment, contract or consultancy or in any other capacity for functioning of the entity prior to their deployment. If the security clearance of any foreign personnel is denied or withdrawn for reasons whatsoever, the investee company is required to ensure that the concerned person resigns or his/her services are terminated forthwith after receiving such directives from the government.
ANALYSIS AND IMPLICATIONS OF PN4 CLARIFICATION
1. Digital media entity
While the PN4 Clarification is broad enough to cover all news aggregators and news agencies that supply information to aggregators or digital media entities, it is still not clear if intermediary platforms operating in the digital space such as social media platforms (e.g. Instagram, Facebook), search engines (e.g. Google, Yahoo), etc., will be covered. A literal interpretation of Paragraph (a) above indicates that such intermediary platforms will also be covered if they are registered or located in India, however, further clarifications may be sought from the GOI on the same.
Another aspect which remains unanswered is whether news channels which are primarily available on non-digital media but may end up being available on and through any digital medium will be covered under Paragraph (b) above. For example, Zee News is primarily a television channel which is available through cable and satellite. Should Zee News be available on Zee 5, will it also fall within the ambit of PN4 thereby requiring compliance with the 26% FDI cap and other conditions as laid down in PN4? As the language of Paragraph (b) is very wide and in the absence of any clarification, news channels will have to be mindful of this implication. Similarly, the language of Paragraph (a) is very wide to cover Zee 5 within its ambit, if Zee 5 is engaged in streaming/uploading news and in absence of any clarification, other entities like Zee 5 which though not news agencies or news aggregators, may still get covered under Paragraph (a) and require to comply with the aforementioned FDI restrictions.
2. Timeline for compliance with PN4 read with PN4 Clarification
Digital media entities have been given sunset/transition period of one year from the date of PN4 Clarification (i.e. till October 16, 2021) to align their shareholding with the 26% FDI cap with the approval of the government. Therefore, it is clear that there will be no 'grandfathering' of existing investments in digital media entities and even the existing digital media entities with more than 26% FDI will have to, within one year align their shareholding in compliance with PN4 with approval from the government. As an illustration – if an existing digital media entity prior to PN4 coming into force has received FDI of 30% under the automatic approval route, then the said digital media entity will now be required to bring its FDI down to 26% or below and further obtain government approval for the same.
The pace at which the government will process the applications from digital media entities is one factor that is unclear and will unfold itself over time. Further, in the event the application is rejected by the government, such digital media entity could face practical challenges with regard to dilution of the foreign investment, specially where the said digital media entity is under financial stress due to pandemic or where there are no potential third party buyers for a secondary sale.
3. Location-based uploading or streaming of content
PN4 read with PN4 Clarification does not make any distinction between entities that are uploading/streaming content from within and outside India. In light of the above, the digital media entities that upload or stream content outside India but are located in India will have to comply with the FDI cap of 26% and other corresponding conditions as set forth in PN4 read with PN4 Clarification.
4. Approval of existing businesses: branch offices and companies
PN4 Clarification further states that it is applicable to entities and their respective branch offices, all of which are registered or located in India. It is unclear whether the branch offices that were set up and functional prior to PN4 Clarification coming into force (i.e. October 16, 2020) will also need to seek approval from the government for continuing their business of uploading/streaming news and current affairs content on the digital platforms.
Further, with respect to registered companies, PN4 Clarification specifies that there will be no grandfathering and the digital media entities are within one year from the date of PN4 Clarification (i.e. by October 16, 2021) required to align their shareholding for ensuring compliance with 26% FDI cap under PN4. This will include within its ambit digital media entities that currently have FDI below the permissible limit of 26% and these entities will also be required to seek government approval within the one-year period to continue itstheir business operations. As an illustration: if an existing digital media entity, prior to PN4 coming into force, has received FDI of 24% under the automatic route, it will now have to apply for the government approval to continue its business operations.
Furthermore, it is unclear whether the restrictions with respect to Board composition and hiring of foreign personnel will be immediately applicable to branch offices and media entities with existing FDI registered or located in India.
5. Interface with uplinking of News and Current Affairs' TV Channels sector ("News Channels")
The FDI Policy currently allows FDI of up to 49% in News Channels under the approval route. However, PN4 read with the PN4 Clarification has now imposed a FDI cap of 26% on entities engaged in uploading and streaming of 'news and current affairs' over the digital media. As a considerable number of News Channels are currently engaged in uploading/streaming of news and current affairs programs on their websites, apps, etc., they may get covered within the ambit of Paragraph (a) above. In such a case, it is unclear whether the FDI cap of 49% would continue to apply to such News Channels that upload/stream their content over the digital media or whether they will be required to restructure their shareholding to comply with the 26% FDI as applicable to digital media entities covered under PN4 read with PN4 Clarification. However, pending any such clarification on the same, the said News Channels will be hit by PN4 and may be required to restructure their shareholding to permissible 26% FDI cap under PN4.
CONCLUDING THOUGHTS
Consumption of media content has now largely moved to the digital space from the print media. Due to the on-going pandemic, the GOI, by virtue of PN4 read with PN4 Clarification, is trying to regulate the FDI in entities operating in the news digital media space. The PN4 was earlier perceived to be a progressive move leading to liberalization of the digital media, however, PN4 Clarifications while attempting to clarify certain lacunae in PN4, have in effect added many restrictive conditions on investment in the digital media entities.Further, it also lacks clarity on various aspects highlighted above. In view of these new restrictions, it has to be seen if the digital media sector is able to attract more foreign investments or will the foreign investors look at it as a highly regulated space and divert their investment elsewhere.