The independent digital news publishers opine that the government's move to cap FDI in digital news to 26% is regressive and detrimental to their future fund-raising plans The digital news media industry and the digital news start-ups have come out against the union government’s decision to cap Foreign Direct Investment (FDI) in digital news at 26%. Unlike traditional media, there was no FDI restriction on digital media players till now. Earlier this week, the Ministry of Information and Broadcasting (MIB) issued an order, asking digital media entities to comply with the new FDI norms by furnishing details like shareholding pattern, directors/shareholders, foreign investment and balance sheet. Further, digital news entities that have FDI in excess of 26% have been asked to take necessary steps to bring down the foreign investment level to 26% by 15th October 2021 and seek approval of the MIB.

The digital news platforms are a worried lot particularly when the FDI cap is seen in conjunction with the government’s recent decision to bring the regulation of over the top (OTT) and digital news content under the purview of the MIB. The common refrain is that the government is tightening its grip on digital media through these regulatory interventions. DigiPub, an organisation formed by 11 digital publications, came out with a statement recently saying that the government interventions don’t bode well for the sector. “The government's policy interventions and prescriptions could seriously limit the potential rather than provide a conducive growth environment to Indian companies and the Indian digital sector. In addition, they would 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,” the statement reads. The industry body also stated that “a restrictive regulatory framework could seriously inhibit its capacity to grow and realise the dream of a digital India with news media companies competing with the best in the world”. It also urged the government to undertake a detailed consultation with all stakeholders, especially digital-only entities will bear the strongest impact of these policies. Legacy media companies, the statement said, cannot accurately and completely reflect digital aspirations and concerns. Speaking to Exchange4Media.com, Newslaundry co-founder Abhinandan Sekhri callled the move "a regressive and retrograde step." He pointed out that the digital media entities that have foreign funding in excess of 26% will have a tough time finding an Indian investor at the right valuation or raise funding to buy back shares in the current market condition. Further, in case an Indian promoter is buying back the foreign investor’s share that will trigger a buy-back offer. “If you want to buyback a foreign investor you also have to give an option to the Indian investor. So where will a company get so much capital and, in this environment?” Sekhri stated. He also said that the details sought by the MIB are already available with the Registrar of Companies (RoC). “The stuff that they have asked to submit is already with the ROC. What's the point of that exercise? There has been no consultation with the stakeholders.” Newslaundry, he said, doesn’t need to worry about the FDI restriction as it well below the 26% mark. However, the FDI policy has put the future fund-raising plans of the company in jeopardy. “We are under 26% limit. We don't have to worry that FDI now but I am worried if I want to raise capital in the future. Even if it doesn't impact me today it can impact me five years down the line.” The Print Editor-in-Chief and chairman Shekhar Gupta said that the government should do away with FDI restrictions across all media. He asserts that placing FDI limits seriously hinders a company’s ability to unlock value. “Till now, we didn't have any FDI in digital news media until this was brought. Our view is that there should be no FDI limit for any media. If you can have 75% ownership in Indian banks or whatever then why not in media? In times of the internet, anybody can publish from anywhere,” Gupta averred. He also noted that FDI limits should be uniform. In TV news, the FDI limit is 49% under the approval route while in print and digital news the FDI limit is 26%. “What applies to one should apply to all. The government should not make a distinction between electronic media, print, and digital. If 49% is the upper limit for TV news the upper limit for everyone should be 49%," he stated. The Print, Gupta noted, doesn’t have any foreign investors. MediaNama founder and editor Nikhil Pahwa seconded Gupta by saying that the media sector needs a liberal FDI policy. “I don't see a point in having FDI restriction in traditional media leave alone digital media. I don't see a reason to restrict the coverage of news by FM radio. These are all unnecessary and regressive policies that need to be shelved. We need to have a more liberal and open media environment in the country. We need to liberalise media and not restrict them.” He also said that the government's move to cap FDI in digital news will make life difficult for Indian digital media companies who have to rely on foreign funding for survival. “In the internet space where the revenues are hard to come by most media start-ups rely on external funding and there is very little funding available from within India,” Pahwa said. “26% limit in FDI basically means that there is going to be a paucity of funds available to digital media companies. For those entities that have sold a substantial part of their stakes to foreign funds now, it will become extremely complicated for them to either find Indian investors or buyback.” Pahwa also challenged the government's claim that digital media is unregulated. “One of the claims that have been made is that digital media is unregulated. That is not the case. All speech, and what the media does is speech, is already regulated by Indian law. You are adding additional restrictions by trying to create a regulatory system for them. And this gives undue advantage to foreign media companies. In fact, you are making it worse for Indian companies.” The News Minute co-founder and editor-in-chief Dhanya Rajendran said, “When the government is thinking of a policy all that we are expecting is that the government will keep in mind that it is formulating this policy to help a sector. But if the interest is only to regulate content and also to restrict business models that would be unfair to the industry. We are looking at how will this impact us and other players in the ecosystem.” Both Sekhri and Pahwa say that the step has been taken without proper consultation with stakeholders. “There is a need for a more democratic approach from the government in terms of consultation and the objective should be to restrict the damage to the functioning of digital media publications in India,” Pahwa said. Sekhri said DigiPub will be writing a letter to the I&B minister and asking for a physical audience to put out their point of view across. Legal point of view TMT Law Practice Managing Partner Abhishek Malhotra said that there is no clarity as to why the government has taken this decision. He, however, noted that while Indian companies will be burdened, foreign companies including aggregators and distributors like Google, Facebook, and Twitter can claim immunity from regulation by virtue of being registered outside India. “Foreign investment is required from the point of view of developing the local ecosystem. But if foreign investment is curtailed then you are effectively saying that entities in this space are adequately funded and they don't need foreign investment. Or you want to curtail the control that the investor has over the information that is being circulated,” Malhotra stated. On the legal aspect of the decision, Malhotra stated that an argument can be made in court that an unnecessary, arbitrary decision has been made and it puts a burden on one set of companies. Impact on social media platforms In a recent blog on the company website, KPMG Partner M&A Tax Lokesh Malik had noted that the Ministry of Commerce & Industry's clarification dated 16th October has increased the scope of the original amendment in the FDI Regulations aimed at governing digital media sector. "The Clarification makes no distinction between digital media entities that are purely engaged in ‘news’ as compared to entities, including OTT 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," Naik wrote in the official blog. He further stated, “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.” According to a Mumbai-based media analyst, digital media companies can circumvent the FDI norms by relocating outside India. Social media giants like Google, Facebook, and Twitter can also change corporate structure to avoid being regulated. “You can circumvent it by moving headquarters outside India to Singapore or Hong Kong or somewhere else. Wall Street Journal is available in India but it is registered outside India. They don't have to worry about this FDI regulation,” the analyst stated. On the likely impact of the FDI regulation on social media companies, Pahwa said, “These companies have the resources to create new structures to avoid this. But I don't know how they are going to do this.” The analyst cited the example of e-commerce where Amazon overcame the regulatory barrier through corporate restructuring. Cloudtail India, one of the largest sellers on Amazon, underwent ownership restructuring to return to the Amazon marketplace. The ownership restructuring was necessitated as the government had introduced new norms which prohibited marketplaces from exercising control over any of their sellers or the inventory. The analyst also feels that the FDI policy will be a regulatory hassle but it will not alter the pace of growth of digital media.