Government liberalizing pattern for FDI reforms

By Gautam Khaitan and Arihant Jain, OP Khaitan & Co
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The government of India is further liberalizing its foreign direct investment (FDI) policies in various sectors in an attempt to thwart what is being called a trend of “economic policy paralysis”. The measures are also aimed at turning around declining investor sentiment and boosting the flow of foreign funds in light of the rupee’s depreciation against the US dollar.

In a press note dated 22 August, the Department of Industrial Policy and Promotion raised FDI limits and relaxed rules on approvals in key sectors including retail, civil aviation, defence, telecoms, insurance, commodity exchanges, power exchanges and broadcasting.

Changes in norms

Under the revised FDI guidelines, the government has relaxed norms for multi-brand retail trading and eased the mandatory 30% local sourcing norms for investors. States can also permit multi-brand retail outlets to be set up in cities with a population of less than 1 million. Further, FDI in single-brand retail trade is now approved up to 49% under the automatic route and up to 100% may be allowed after approval.

Gautam Khaitan
Gautam Khaitan

In the telecom sector the cap was increased to 100% from 74% and up to 49% can come through the automatic route. In defence production the 26% cap was retained, although the Cabinet Committee on Security may consider a higher level on a case-to-case basis for state-of-the-art technology production.

In petroleum refining FDI up to 49% was allowed under the automatic route, where the earlier norm required approval. The FDI limit in asset reconstruction firms was raised to 100% from 74%. In courier services the FDI cap was already 100% but the entry route has changed from government approval to automatic approval. In credit information firms 74% (FDI + foreign institutional investment) was allowed under the automatic route.

Recent approvals

The government recently approved 15 proposals for FDI totalling about ₹20 billion (US$326 million) based on the recommendations of Foreign Investment Promotion Board. In addition, two proposals amounting to ₹106.68 billion – by IDFC Trustee Company, as proposed Trustee for India Infrastructure Fund II of Mumbai, and Mylan Inc of the US – have been recommended for consideration of Cabinet Committee on Economic Affairs.

Jubilant Pharma of Singapore received approval to bring in FDI of ₹11.45 billion to set up a wholly owned subsidiary in India which will engage in brownfield pharma activities. Other major approvals include Symbiotec Pharma Lab, Madhya Pradesh (₹3.06 billion), Advanced Enzyme Technologies, Mumbai (₹2 billion), Lotus Surgical Specialities, Mumbai (₹1.5 billion) and Premier Medical Corporation, Mumbai (₹900 million).

In the pipeline

Indian Railways’ routes are spread over 64,015 kilometres with 12,000 passenger and 7,000 freight trains plying each day from 7,083 stations, carrying around 23 million travellers and 2.65 million tonnes of goods daily. At present, there is a ban on any kind of FDI in the railways sector but under a new proposal, the government may open up the railway industry to FDI.

Under the proposal, foreign investors would be able to hold a 100% stake in special purpose vehicles that build port connectivity schemes and railway lines that will link mines and industrial centres to the present rail network, which in turn would allow smoother movement of raw materials.

Arihant Jain
Arihant Jain

Further, FDI is currently not allowed in business-to-consumer e-commerce, but only in the business-to-business segment. The country’s e-retailing sector grew from US$2.5 billion in 2009 to US$14 billion in 2012 and is expected to reach US$200 billion by 2020. At present, foreign entities can only provide online platforms for third parties and consumers to sell and buy products and are not allowed to sell from their own inventories. The government now intends to allow FDI in e-commerce, to make way for global giants such as Amazon and eBay to operate in India as well to finance Indian companies such as Flipkart and Myntra.

Conclusion

Despite volatility in the market and a plunge in manufacturing and service sector output, investors retain hopes for the Indian scenario. The country’s growth rate is expected to be higher than that of other developing economies. However, analysts believe that the current economic environment and the government’s approach to the regulatory challenges are important aspects in boosting investors’ confidence.

Although there is a political mayhem in India right now, the government is still committed to liberalizing its approach to smoothing the way for foreign investors in India. The gap between what the government plans and the way it is being implemented should also be bridged at all levels of bureaucratic procedure. Many areas in FDI policy still need redefining to eliminate ambiguities and provide clarity to reduce investors’ apprehensions.

OP Khaitan & Co is a 40-lawyer law firm, based in New Delhi. Gautam Khaitan is the firm’s managing partner and Arihant Jain is a junior partner.

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