Policy

What does the 26% FDI cap mean for digital news media?

Nandana James Mumbai | Updated on November 19, 2020 Published on November 19, 2020

Since FDI caps already existed for print and broadcast news platforms, that this new move is creating a level-playing field for all mediums - print, broadcast and digital media - is a consensus in favour of the FDI limit for digital news media.

The imposition of a 26 per cent limit on foreign direct investment in the digital media sector can hamper its growth potential, be a disincentive to incorporating companies in India, and lead to an unfair advantage for global players, said digital news companies and experts.

This 26 per cent FDI limit was first imposed in September 2019. The  Information and Broadcasting Ministry has reinforced this on November 16 through a public notice asking “entities involved in uploading/streaming of news and current affairs through digital media, to comply with the decision of Union Government on September 18, 2019, which had permitted 26% FDI under Government approval route”.

Before September 2019, the FDI caps had existed only for the print media at 26 per cent and news broadcast television companies at 49 per cent, with the digital media facing no such cap.

“I think the current move (FDI limit) comes from a very Licence Raj mentality in a way, where the government wants to control the sector - and I am presuming good faith here - in a way where it can insulate it from foreign interest. But it poses a larger question - why will companies not just structure and register themselves abroad, register the website there, and pay people through consultancy contracts in India?” Apar Gupta, executive director at the Internet Freedom Foundation, a digital rights group, told BusinessLine. To be sure, the FDI limit is only applicable to Indian entities registered or located in India.

Compliance

This move implies that there are two ways to comply - to either operate within India and bring down the FDI limit to 26 per cent or get the company registered in a different country, affirmed Prasanth Sugathan, legal director of the digital rights organisation SFLC.in.

Since entities can seek registration in other countries without having to comply with the FDI limit in India, this could be a disincentive to growing the sector locally, said Gupta. “It results in (not just) a negative impact on the media ecosystem in India, but also economically, in terms of collection of taxes and business activity within the country. And this is happening at a time when the government wants to encourage greater degrees of investment.”

In a statement released by DIGIPUB News India Foundation - a consortium of digital news organisations - on November 17 regarding the government’s proposals on bringing digital news publishers under the ambit of the I&B ministry and the FDI cap, it said: “The government's policy interventions and prescriptions could seriously limit that potential (of the digital news industry) rather than provide a conducive growth environment to Indian companies and the Indian digital sector. Besides, they put Indian companies at a serious disadvantage to foreign news brands, and disincentivise entrepreneurs from incorporating companies in India that could be a part of the India growth story".

DIGIPUB’s founder members include Alt News, Article 14, Newslaundry, Scroll, News Minute, The Quint and The Wire. Amid a pandemic when economies, investments and jobs are faltering in India and around the world, such moves by the government are likely to do more harm than good, it added. Restrictive policies could have serious consequences, including job losses, it said.

 

When digital news portals get controlled in indirect ways like regulating their access to investment and capital, it is a matter of concern, said Sugathan.

So, it becomes pertinent to understand the objective of this move.

That print and broadcast media were already complying with FDI caps, as well as concerns that security could be compromised if media outlets are controlled by entities from certain countries which are opposed to India could be the reasons, said Rameesh Kailasam, CEO, IndiaTech.org., a think-tank for Indian start-ups.

Since FDI caps already existed for print and broadcast news platforms, that this new move is creating a level-playing field for all mediums - print, broadcast and digital media - is a consensus in favour of the FDI limit for digital news media. But the implications can be different for digital news platforms, said experts.

Think of it more like a start-up kind of a scene where you will need some support initially, Sugathan pointed out. “The digital media is in a pretty nascent kind of a stage, and they will need some support during this phase. And that will be hindered if you can only get investment from domestic sources and not from abroad.” Being a “fledgling” sector, restricting FDI - consequently limiting access to funds - can hamper its growth, he added.

It will be counterproductive to our national economic interest, as well as the growth of the sector, since media entities can get structured in a way wherein they are not registered in India as they would want greater flexibility in the kind of business opportunity and investment options available to them, said Gupta.

This then raises the question of how print and broadcast portals were able to cope all this while with the apparent lack of flexibility posed by FDI limits.

“It's not to say print and television do not have this problem. And which is also speaking to the relative weakness in both the print and the television sector - that's why channels close down, and news channels do close down every now and then. And they have trouble finding investors. That's why you also have media concentration in terms of specific classes of investors controlling large segments or media entities,” said Gupta. What is happening today is that rather than looking at deregulation, we are over-regulating, he added.

We should possibly look at the present and the future rather than the past when we make rules, Gupta added. “So what may be better, in terms of a much more sound public policy choice, is actually a deregulation...rather than bringing in Licence Raj kind of restrictions - they are not only suited to the time and place we are in right now, but also to the underlying technicalities of the media ecosystem, and how investment happens today.” Historically, FDI in news was not permitted as it is presumed that owing to its sensitive nature, journalistic reporting and newsgathering requires a degree of insulation from any influence which may accrue from having a foreign investor, Gupta added.

On latest notification

In its latest notification, the I&B Ministry has also asked digital news media players that have an equity structure with more than 26 per cent foreign investments to reduce this to the prescribed norms by October 15, 2021 with the Ministry’s approval. All digital news media organisations have also been asked to furnish information related to their shareholding and financials within a month. The compliance with the FDI limit that is expected within a year also comes with challenges.

This can start a collective movement of several sellers and the lack of an adequate number of buyers or capital in the local market to fill in the gap, said Gupta. “So essentially, when more people are selling, less people are buying, the price drops. So it may actually result in losses for existing investors. And the valuation will possibly be stressed as well.”

Moreover, broadcast news entities - which operate with a 49 per cent FDI limit - may also have an online platform akin to that of digital news platforms, except that they enjoy the benefit of a 49 per cent FDI unlike digital-only platforms, resulting in a paradoxical situation, Kailasam pointed out.

In October, the government had clarified that this FDI norm would also apply to news aggregators, which use software and aggregate content from various sources in one location.

International news aggregation platforms are today multi-billion dollar assets and the move to restrict FDI for news aggregators can come in the way of similar Indian startups coming up in the space due to restrictions on capital sourcing, said Kailasam. “By restricting 26 per cent FDI to news aggregators from India, we are creating an uneven level playing field where it will advantage foreign news aggregators, who will continue to grow bigger and bigger, with many who may not be paying anything for sourcing news content as well. The FDI restriction for Indian aggregators may force such businesses in India to relocate elsewhere to be able to compete and expand to other geographies."

Ideally, news aggregators should have been left out of this cap because they are primarily software companies - which aggregate content from various sources in one location - and necessary checks and balances could have been recommended to ensure they have contracts with newspapers and media outlets for sourcing news legally for their aggregation, said Kailasam.

There is also a need for consultation with stakeholders when it comes to devising new policies, said experts.

"We urge the government of India to undertake a detailed consultation with stakeholders, especially digital-only entities that will bear the strongest impact of these policies," said the statement from DIGIPUB. "Legacy media companies cannot accurately and completely reflect digital aspirations and concerns.”

“Hastily issued policies and rules could prove disastrous to India’s right to stay informed,” it concluded.

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Published on November 19, 2020
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