Foreign direct investment in railways moving ahead

Indian Railways, the largest rail passenger carrier and the fourth largest rail freight carrier in the world, has historically been plagued with problems of inadequate infrastructure, high operating costs, funding shortfalls and inefficiency in management. Government policies to increase private participation in the railways sector met with limited success. Further, funding sources were limited as foreign direct investment (FDI) was not permitted in the railways sector (except in mass rapid transport systems where 100% FDI is permitted without prior government approval, known as the automatic route).

Recent changes

The minister of railways, in the railway budget for 2014-15, proposed that FDI be permitted in the sector. Following this proposal, the Ministry of Commerce and Industry, the Department of Industrial Policy and Promotion and the Reserve Bank of India issued notifications pursuant to which private participation, including up to 100% FDI through the automatic route, has been permitted in several areas in the railways sector.

The Ministry of Railways has also issued sectoral guidelines for domestic and foreign investment in the sector. The guidelines include an option for investors, customers or zonal railways to propose a project by submitting a concept note to the Railway Board. If approved, the public-private partnership (PPP) cell of the Railway Board will be involved in structuring the project. Further, for projects being allocated through a bidding process, the guidelines provide that the zonal railway will be responsible for the bid process and drafting the documents, based on model documents approved by the Railway Board. The monitoring of approvals of the projects at different levels will be coordinated by the board’s Advisor (Infrastructure).

Akshay Jaitly is a partner at Trilegal and Suchita Saigal is a senior associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.