Govt changes investment policy to allow more automatic FDI in many industries
Manoj Kumar | November 16, 2015
After seemingly meandering off target for a while, the Modi government has in a bid to expedite investment in the Indian market, reverted to its development focussed agenda by facilitating simpler foreign direct investment norms for 15 major areas, including focal sectors such as defence, mining, civil aviation, broadcasting and agriculture.
In a notification last week, the Centre announced increase in passage of FDI through the automatic route.
Even though data from the Department of Investment Policy and Promotion (DIPP) reveals that FDI inflows have been brisk in the last one year, it has been felt that providing for more, and easier, channels of investment might serve to further the value of FDI to the economy. To this end, the government has increased the powers of the Foreign Investment Promotion Board (FIPB) - the body through which all investment from abroad is processed - to give single window clearance for projects of up to Rs 50 billion from previous limit of Rs 30 billion. In doing so, it hopes to enhance India’s profile as a viable economic destination.
Here is a primer on some of the more important developments in this regard:
Defence: FDI enabled up to 49 % under automatic route and beyond that through the FIPB’s approval. The government has done away with requirement of mandatory permission from the Cabinet Committee on Security for such projects. Portfolio investment and investment by FVCIs will also be allowed up to permitted automatic route level of 49 %. This is aimed at boosting the domestic industry since the country currently imports up to 70 per cent of its military hardware.
Mining: The immediate future course in the mining sector would include a government initiative to bring in an amendment to the Mines, Minerals Development and Regulation Act (MMDRA), promulgated in January. According to the government official, the prime focus of such an amendment would be to ensure improved ease of doing business by relaxing the laws governing the transfer of mining leases from one entity to another in the case of mergers and acquisitions (M&As) of companies operating in the mining sector. Under the new regulations, mining leases secured by companies through the new modus operandi of auction and competitive bidding were freely transferable from one entity to another in the case of M&As. However, the same was not permitted in the case of mining leases granted earlier through the preferential allotment of mineral resources.
Civil Aviation: Investment limits raised from 74 % to 100 %, thus allowing foreign general aviation charter operators and large ground handling companies to set up their own bases in India. The government has also allowed FDI up to 49 % for regional air transport services, possibly an attempt to fillip the government's regional connectivity plan announced in its draft civil aviation policy.
As per the present FDI policy, investment up to 49 % is allowed in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline. It has now been decided that Regional Air Transport Service is will also be eligible for foreign investment up to 49 % under automatic route.
Broadcasting Sector: 100% FDI is now allowed (upto 49% automatic route and beyond that through government route) in teleports, direct to home, cable networks, mobile TV, headend in the sky broadcasting service and cable networks. FDI also increased to 49 per cent in FM radio through the government route.
Banking in private sector: The government has brought in a composite cap by removing sub-limits for FDI and FII, allowing FIIs/FPIs/QFIs to invest up to the sectoral limit of 74%, provided there is no change of control and management of the investee company. The new rule will give the banks and investors considerable flexibility in raising funds and investing respectively.
Plantation cropping: FDI up to 100 % now allowed for plantation crops such as coffee, rubber, cardamom, palm oil tree and olive oil tree via automatic route. At present, this is allowed only in tea plantation through the government approval route. This step will enable investors to either purchase or partner with domestic players. Further, it might help lower India's edible oil import bill and bring in new technology.
Construction development: Entry and exit barriers in this sector – such as area restrictions and minimum capitalisation requirement within six months of commencement of business - have been done away with. Now, foreign investors can exit and repatriate investments before a project is completed, but with a lock-in of three years. This will mean that projects under construction, regardless of size, can have access to FDI.
Single Brand Retail Trading and Duty free shops: The government has announced the easing of several conditions for single brand retail trade and e-commerce. It has been decided that in case of state of art and cutting edge technology, sourcing norms - that 30 % of value of goods will have to be purchased from India - can be relaxed subject to government approval. The government also permitted entities who have been granted permission to undertake single brand retail to do e-commerce.
A single entity will be permitted to undertake both the activities of single brand retail trading (SBRT) and wholesale with the condition that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by both the business arms separately. Currently, wholesale/cash & carry trader cannot open retail shops to sell to the consumer directly.
FDI up to a 100 % in duty free shops has also been approved.
Investment by companies owned and controlled by Non-Resident Indians: These will now be treated as domestic investment. A possible advantage in doing this might be that NRI support for the current government dispensation, especially because of PM Modi, might be leveraged for the benefit of the country.
Limited Liability Partnerships: 100% FDI has been allowed under the automatic route in LLPs in sectors where 100% overseas investment is allowed.
In making these changes, the government appears not to be soliciting more FDI [though such a result would be welcome], but seeking to make current foreign investment more productive and far-reaching. The combination of all these measures could potentially boost FDI inflows and offer multiple spin-off benefits to the economy, not the least of which would be increased job creation and higher tax revenue.
The push on reforms is bound to push the Make in India and Digital India initiatives of the government apart from seeking a huge climb-up in FDI inflows in the coming months.
It is a further statement of the government’s resolve to improve the country’s economy that this development comes just ahead of the Winter Session of Parliament, wherein such legislation as the Goods and Services Tax Bill, also high on the government’s priorities, is expected to be taken up for passage – and on the heels of the recent World Bank ease-of-doing business report that improved India's ranking by 12. It is no incident, then, that India has in this time also overtaken China as the most preferred destination for foreign investment.
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