Govt.'s FDI Booster Shot - Analysis & Impact of Radical Changes
Apurv Sardeshmukh (Partner, Legasis Partners)
Introduction:
On Monday, the Govt. of India announced[1] sweeping changes in India’s Foreign Direct Investment Policy (‘FDI’), opening up the airline business to 100% ownership, relaxing rules for single brand retail and defense and putting most sectors on the automatic approval route. This move is seen as a significant step in opening India’s markets to foreign investors and is in line with the liberalization of the FDI Policy which the Govt. has undertaken since last year.
Some of the significant changes and their impact are as follows:
The Govt. has further opened up the defense sector for foreign investment. Existing policies already allowed for FDI up to 49% under the automatic route and any investment above this threshold was dependent on Govt. approval on a case-to-case basis in the defence sector. The change, now, is the removal of the “access to state-of-the-art technology” clause for the latter i.e. the government has dropped the 'state-of-the-art' clause for FDI over 49% limit.The FDI limit for the defense sector has also been made applicable to small arms and ammunition manufacturing.
The change in the FDI policy for the defense sector can result in foreign defence equipment makers opening production centres in India. Greater ownership control may also see more JVs. The Government will also hope that this change will boost to its ‘Make in India policy’ and more foreign companies will set up their production centres in India.
100% FDI under the automatic route has been approved in Broadcasting carriage services like Teleports, Direct to home (DTH), Cable network, Mobile TV, Head end-in-the Sky Broadcasting Service (HITS), etc. Opening of FDI cap in this sector would bring relief to cable industry which is struggling under the process of digitization. However, it must be noted that 100% FDI was already allowed (49% FDI under automatic route and beyond 49% through government approval) in this sector earlier as well.
In the aviation sector, 100% FDI is now allowed in the development of brownfield airports. Earlier 74% FDI was allowed in this sector. Further, the Govt. has now allowed 100 % FDI, under the approval route in the Airlines sector.49% FDI is allowed under the automatic route under this sector. In view of the fact that the Govt. has recently announced the new Civil Aviation Policy, the Aviation sector is expected to undergo significant changes in the coming months.
In the pharmaceutical sector, to the Government has permitted up to 74% FDI under the automatic route in brownfield pharmaceuticals while government approval route beyond 74% will still continue to prevail. The Govt.’s decision to increase FDI to 74% in existing pharmaceutical companies through the automatic route is expected to boost mergers and acquisitions (M&A) and private equity investments in the sector in future. This move so far has been welcomed by the Industry as well as global players looking to invest with Indian collaboration in India. However in view of the fact that cap extends only till 74%, some investors may not be willing to invest in the pharmaceutical sector as yet.
The government has relaxed the local sourcing norms up to 3 years and a relaxed sourcing regime for another 5 years for entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting edge’ technology. This would mean it would be easier for single brand retailers to set a footing in India. With this change, single brand retailers can avoid local sourcing norms for 8 years.
Private security agencies can now bring in up to 49% FDI under the automatic route. Beyond 49% and up to 74% would require government approval. This is a marked change from the existing policy that allows 49% FDI under Govt. approval route in private security agencies. However, it must be noted that Private security agencies are governed by the Private Security Agencies Act, 2005 which will have to be amended to be able to implement the revised norms.
Conclusion
While the initiative of the Government needs to be applauded, certain clarifications are still required to be provided with respect to the latest amendments to the FDI policy.What would constitute ‘modern’ for defense sector and ‘cutting edge’ for Single brand traders remains to be seen as the terms have not been defined so far and clarity with respect to the same needs to be provided. There is a view that while the government’s move to liberalize foreign investment will improve investor sentiment and, in the longer run, bring benefits to firms in these sectors, the Government could have been braver and liberalized some of the sectors even more. Finally, like all legislations in India, how the amendments will be implemented and how the Government progresses in its desire to ease the doing of business in India, will ultimately decide India’s economic growth.
Comments
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Ramesh Sharma on June 28 2016
An article written with brevity and clarity. Captures well the GOI's mind set and intention to bring in mega liberalisation measures coupled with caution to test waters instead of opening up the flood gates. Ease of doing business still remains a major issue. Kudos to the author!