The Centre on Tuesday announced 'Big Bang' Foreign Direct Investment (FDI) reforms, easing norms across 15 sectors including defence, banking, construction, single brand retail, broadcasting and civil aviation. This is aimed at boosting the investment environment and bring in more foreign investments in the country.
The move comes two days after the Bharatiya Janata Party-led National Democratic Alliance suffered a resounding defeat in the Bihar Assembly elections. It also comes a day before the Prime Minister Narendra Modi's visit to the UK where he would have had to otherwise face tough questions on his government's major initiatives to spur foreign investment.
It also comes just ahead of the crucial Winter Session of Parliament, slated to start on November 26, where important Bills such as the Goods and Services Tax Bill are expected to be taken up for passage.
For facilitating faster approvals on most of the proposals, the government also raised the threshold limit of approval by Foreign Investment Promotion Board from the earlier Rs 3,000 crore to Rs 5,000 crore. As per the extant policy, FIPB considers foreign investment proposals of inflow up to Rs 3,000 crore and those above that limit are placed for consideration of the Cabinet Committee on Economic Affairs.
A senior industry ministry official said “by far, these (set of reforms) are the biggest path-breaking and the most radical changes in the FDI regime ever undertaken by the Centre. With the Prime Minister's approval and after several rounds of inter-ministerial consultations, we have brought out about 35 changes in the FDI policy cutting across 15 sectors. We have expedited these changes over the last couple of weeks. This exercise could have other wise taken over a year and would have needed over 16 cabinet notes.”
Crux of the reforms
According to an official release, the crux of these reforms is to further ease, rationalise and simplify the process of foreign investments in the country and to put more and more FDI proposals on automatic route instead of Government route where time and energy of the investors is wasted.
Significantly, undeterred by the debacle in Bihar polls, the BJP-led NDA government stated that: “With this round of Reforms, the government has demonstrated that India is unstoppable on the path of economic development... It is also clear that India is a country which is more than ready to integrate with the global economy..”
For the sake of ease of doing business, the Industry Ministry will soon consolidate all FDI related instructions contained in various notifications & press notes and prepare a booklet so that the investors do not have to refer to several documents of different time-frames.
The official release said refining of foreign investment norms in construction is to facilitate the construction of 50 million houses for poor. It added that opening up of the manufacturing sector for wholesale, retail and e-commerce is aimed at motivating industries to Make In India and sell it to the customers here instead of importing from other countries.
According to Industry Ministry data, India received FDI of $19.39 billion during January-June 2015, an increase of 30% over the same period last year. The Modi government in the last few months had introduced many FDI policy reforms in sectors such as defence, rail infrastructure, construction development, insurance, pension, medical devices, white label ATM operations, investments by NRIs on non-repatriation basis and has introduced composite cap for foreign investment.
The World Bank had recently improved India's ranking by 12 places (to 130th rank from 142nd rank last year) in the 2016 Study of Ease of Doing Business. Besides, many global institutions have projected India as the leading destination for FDI in the World. IMF has branded India as the brightest spot in the global economy whereas the World Bank has retained the growth forecast for India at 7.5% for FY16.
Main sectoral changes in the FDI regime:
-- Construction sector: The struggling construction sector will be a major beneficiary as radical changes in FDI norms have been brought in to boost demand for steel, cement and spur economic activity, ultimately with an aim to help build 50 million affordable houses for the poor.
Several conditions have been removed including the area restriction of floor area of 20,000 sq.m. in construction development projects and minimum capitalisation of $5 million which needed to be brought in within six months of the commencement of business. Also, foreign investors have been allowed to exit and repatriate their investment under automatic route before the completion of the project provided they complete a lock-in period of three years.
-- Defence: Foreign investment up to 49% has been allowed under automatic route from the earlier government approved route. Proposals for foreign investment in excess of 49% will be considered by FIPB.
Portfolio investment and foreign venture capital investment, which were restricted to 24%, have now been hiked to 49% and that too through the automatic route. To ensure that ownership and control remain in Indian hands, Government approval, of course, will be required in case of infusion of fresh foreign investment within the permitted automatic route level, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor.
Just this Monday, in a big boost for the Centre's Make In India initiative, Boeing and Tata Advanced Systems had announced their JV “to make aerostructures for the AH64 Apache helicopters and to compete for additional manufacturing work across Boeing platforms, commercial and defence.” The latest FDI reforms are expected to result in more such JVs in defence.
Foreign investment above 49% was permitted earlier too, subject to approval of Cabinet Committee on Security on case to case basis, of course only if the investment was to result in access to ‘state-of-art’ technology in the country.
-- Broadcasting: In terrestrial Broadcasting FM (FM Radio), and in up-linking of ‘News & Government route Current Affairs’ TV Channels FDI upto 49% is allowed through the FIPB route (from the earlier 26%), while 100% FDI is allowed through the automatic route in up-linking of Non-‘News & Current Affairs’ TV Channels. 100% FDI is also 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.
-- Banking: In private sector banking, the government has brought in a composite cap by removing the sub-limits for FDI and FII, thereby allowing FIIs/FPIs/QFIs to invest upto the sectoral limit of 74% provided there is no change of control and management of the investee company. The existing foreign portfolio limit of 49% was coming in the way of fund raising plans of private sector banks such as Yes Bank, Kotak Mahindra Bank and Axis Bank. The new rule will give the banks and investors considerable flexibility in raising funds and investing respectively.
-- Plantation: The government also decided to plantation activities namely; coffee, rubber, cardamom , palm oil tree and olive oil tree plantations also for 100% foreign investment under automatic route. As of now, only tea plantation was open to foreign investment.
-- NRIs: Investment by companies/trusts/partnerships owned & controlled by NRIs on non-repatriation basis will now be treated as domestic investment.
-- e-Commerce: Manufacturers have been allowed to sell their product through wholesale and/or retail, including through e-commerce without Government approval.
-- Retail: Though the BJP-led government stayed away from any mention of multi-brand retail so as to protect the interests of their key vote bank of small traders, it has announced easing of several conditionalities for single brand retail trade (SBRT) and e-commerce. It has now 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, a move that will benefit companies such as Ikea. The government also permitted entities who have been granted permission to undertake SBRT, to do e-commerce. The government has eased FDI policy conditionalities for Single Brand Retail Trading, besides permitting 100% FDI in duty free shops.
Also, 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.
-- LLP: 100% FDI in LLPs has been permitted under automatic route.
-- Aviation: Regional Air Transport Service will be eligible for foreign investment up to 49% under automatic route. Under the present FDI policy, foreign investment up to 49% is allowed only in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline.
Foreign equity caps of certain sectors -- Non-Scheduled Air Transport Service, Ground Handling Services, Satellites-establishment and operation and Credit Information Companies have now been increased from 74% to 100%. Further, sectors other than Satellites- establishment and operation have been placed under the automatic route.
-- Other changes in rules: No government approval is required for investment in automatic route by way of swap of shares.
For infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments, Government approval will not be required for activities under the automatic route and without FDI-linked performance conditions.