Liberalising the foreign direct investment (FDI) regime for the second time in its tenure, the Centre last Wednesday permitted foreign airlines to invest up to 49% in debt-ridden Air India, and eased norms for investment in single brand retail, construction and power exchanges. The government also relaxed FDI policy for medical devices and audit firms associated with companies receiving overseas funds.
The decision comes amid gloomy reports by rating agencies and Prime Minister Narendra Modi’s visit to the World Economic Forum in Davos, scheduled from January 23 to 26.
“Global brands across different categories, from apparel to electronics to accessories, will be aided through this, providing further options to Indian consumers and improving India’s ranking in ease of doing business,” said Rajat Wahi, Partner, Deloitte India. The NDA government had earlier effected major FDI changes in June 2016.
Single Brand Retail
In a move that will boost foreign retailers like Ikea, the government has approved 100% FDI under the automatic route for Single Brand Retail Trading (SBRT).
The prevalent policy on SBRT permits 49% FDI through the automatic route, and FDI beyond 49% till 100% needs government approval.
Amendments to the FDI policy are “intended to liberalise and simplify the policy so as to provide ease of doing business in the country. In turn, it will lead to larger FDI inflows contributing to growth of investment, income and employment,” the government said in a statement.
The move will not only attract additional foreign capital into the country, but will also provide an impetus to the retail industry growth, at a time when organised and retail is already seeing strong growth over the last 12 months.
The 30% local outsourcing norm too has been relaxed. SBRT entities can “set off their incremental sourcing of goods from India for global operations during initial five years, beginning April 1 of the year of the opening of the first store against the mandatory sourcing requirement of 30% of purchases from India.”
FDI in Air India
Foreign airlines can invest up to 49% under approval route in Air India. This comes against the backdrop of the government’s plans to disinvest the state-owned carrier.
“Foreign investment(s) in Air India, including that of foreign airline(s), shall not exceed 49 per cent either directly or indirectly substantial ownership and effective control of Air India shall continue to be vested in Indian National,” the government said.
Air India had a total debt of about Rs 48,877 crore at the end of March 2017, of which about Rs 17,360 crore was aircraft loan and Rs 31,517 crore was working capital debt.
The airline is expected to report a net loss of Rs 3,579 crore for 2017-18, as per budget estimates for 2017-18. It had a provisional net loss of Rs 3,643 crore in 2016-17.
Overseas investment policy has also been liberalised in the case of power exchanges, an online platform where electricity is traded. Currently, the policy provides for 49% FDI under automatic route in power exchanges.
However, FII/FPI (foreign portfolio investors) purchases have been restricted to secondary market only. “It has now been decided to do away with this provision, thereby allowing FIIs (foreign institutional investors/FPIs) to invest in power exchanges through primary market as well,” the government said.
On the liberalisation in the construction development segment, the government has clarified that “real-estate broking service does not amount to real estate business” and is, therefore, eligible for 100% FDI under the automatic route.
Commenting on the development, Commerce and Industry Minister Suresh Prabhu said the decisions would help “remove roadblocks” for receiving foreign investments and would facilitate faster development of the economy.
Further, issue of shares against non-cash considerations like pre-incorporation expenses and import of machinery will now be permitted under the automatic route in the case of sectors that do not require government nod. Earlier, approval was needed for pre-incorporation and expenses.
Relaxing a procedural requirement, the government has now decided that for investments in automatic route sectors, approval is required only in cases of investment from country of concern (Pakistan and Bangladesh) and such FDI applications would be processed by the DIPP for government nod.
Cases under the government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by the administrative department or ministry concerned.
Earlier, the applications were processed by the Ministry of Home Affairs.