Digital media players in India had for the last 10 months been seeking clarification from the Indian government on the applicability of foreign investment rules on their businesses. Finally, the Ministry of Commerce and Industry on October 16 released a ‘clarification’, that would have, in Industry’s expectations, been targeted to clear the air around the scope of entities/ activities that are covered under these rules. The clarification appears to have increased the scope of the original amendment in the FDI regulations and is aimed at governing the digital media sector.
To quickly recap, foreign investment in digital media was regulated by the Indian government by issuing Press Note No. 4 (2019 Series) (“PN 4”). Pursuant to PN 4, foreign investment up to 26 percent, under government route, was permitted for ‘digital media’ entities. PN 4 defined digital media to mean “uploading/streaming of news and current affairs through Digital Media”. Given the nature of this technologically driven business and the manner of consumption of digital content, there was a lack of clarity on the scope of PN 4 and what all activities were covered under ‘digital media’, requiring compliance with PN 4. The Department for Promotion of Industry and Internal Trade (DPIT) issued the clarification to ‘seemingly’ simplify the ambit of PN 4. This clarification, though on one hand has re-enunciated the overarching principle that foreign investment in digital media is regulated, but on the other hand, has significantly increased the scope of PN 4.As per the clarification, PN 4 would apply to the following categories of ‘Indian entities’ which are ‘registered’ or ‘located’ in India.
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 aggregator, 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.
Certain additional restrictions have been imposed on the composition of the Board of Directors, citizenship status of the CEO and requirement of security clearance. Given the wide-ranging ramifications, a one year window has been provided to comply, including seeking post-facto approvals from the Indian government.
The clarification states that PN 4 applies to ‘Indian entities’ that are ‘registered’ or ‘located’ in India. The use of the word ‘located’ in India will require global digital players that operate from outside India but have sales/ operational teams in India to evaluate the applicability basis the nature of operations of such Indian entities. If the Indian entity gathers news content and shares with its overseas digital platforms, not registered in India, will restrictions of PN 4 apply? Additionally, overseas media companies that have set-up 100 percent owned entities in India to operate ‘India specific websites’ will be hit and may need to restructure the operations, including considering brand licensing models, unless they will be open to joint ventures with Indian majority partners.
The clarification makes no distinction between digital media entities that are purely engaged in ‘news’ as compared to entities, including OTT (Over The Top) players, which deal in ‘social’ and ‘entertainment content’ in addition to ‘news’ content. It will need to be evaluated whether such players, including, OTT players that stream news or current affairs channels will be impacted. In the broadcasting sector, non-news and current affairs television channels are prohibited from carrying news content.
News aggregators are one category of stakeholders that will slightly be disappointed with the clarifications. They had made several representations, seeking exemption from the applicability of PN 4 given their tech-driven algorithmic business model as opposed to ‘news creation’. Companies in this space have raised significant amounts of VC/PE capital, including Chinese investments, and will need to immediately move to the drawing board to assess options/ structures, including seeking Indian JV partners, to ensure compliance with the regulatory framework. It will be interesting to see how valuations play-out in such sell-down negotiations.
One point that has still not been specifically addressed is the impact on legacy television players who run digital news arms; the foreign investment limits for television players operating news and current affairs content is 49 percent as compared to 26 percent for digital media—do they continue as is or hive off digital news arms.
Overall, the clarification, while providing the much-awaited answers, has raised many pertinent questions/issues relevant for digital media businesses and specifically at a time when this sector has witnessed significant growth in adoption. Digital media companies specifically platforms operating as aggregators, and their stakeholders will need to immediately assess the impact on ownership and business structures and undertake the necessary steps, to ensure compliance in an efficient manner.
—Lokesh Malik is Partner, M&A and PE Tax, KPMG in India. The views expressed are personal