The Cabinet on Wednesday decided to allow foreign airlines to invest up to 49% in ailing Air India, which is on the block, and eased foreign direct investment (FDI) policies in some critical areas, including single-brand retail, broking services in construction, pharmaceuticals and power exchanges. It permitted up to 100% FDI in single-brand retail through the automatic route and relaxed the 30% local sourcing norm, a major irritant for foreign players. The incremental procurement that foreign companies will do in India for their global operations will also be counted as part of their local sourcing obligations in initial five years.
The changes will help foreign companies, including iPhone maker Apple, that are eyeing a bigger slice of the Indian market, and even Ikea and H&M that have been seeking relief in the sourcing rule (Ikea plans to launch its first store in Hyderabad in April). Prior to the move, although the government allowed up to 100% FDI in single-brand retail, investments beyond 49% required the government’s approval. To facilitate the divestment of Air India (AI), foreign airlines will now be allowed to buy up to 49% in the national carrier, through government approval, on condition that the investments won’t exceed this limit even indirectly and substantial ownership as well as effective control will continue to be vested in an Indian national.
Prior to the decision, although foreign investment up to 100% was allowed in airlines (subject to a cap of 49% for foreign airlines), no foreign investment was permitted in AI. Wednesday’s move would enable a foreign airline to tie up with a domestic airline to bid for the ailing national carrier, the privatisation process for which has already been initiated by the government. Capping foreign investment at 49% in AI would allow it to retain the “national carrier status” even after privatisation, which would enable investors to hold on to AI’s valuable flying/landing rights and parking slots at airports across the world, attained through various bilateral, government-to-government deals. Since AI has debt and dues of about Rs 60,000 crore, the government hopes such lucrative bilateral rights would induce the prospective buyers to take over aircraft-related loans of about Rs 20,000 crore along with fuel dues of Rs 8,000 crore.
The government also clarified that real-estate broking services don’t amount to realty business and is, therefore, eligible for 100% FDI under automatic route, in sync with the rule applicable to other broking services. It also decided to allow FII/FPIs to invest in power exchanges through the primary market as well. Earlier FII/FPI purchases were restricted to the secondary markets only. The government also relaxed FDI policy for medical devices and audit firms associated with companies receiving overseas funds. It made it clear that for matters relating to foreign investments, the definition of medical devices will be as per the one contained in the FDI policy documents. Earlier, the definition stipulated in Drugs and Cosmetic Acts was taken into account for such purposes. The government also relaxed/clarified certain other approval-related procedures.
It also allowed issue of shares against non-cash considerations like pre-incorporation expenses and import of machinery under automatic route in case of selectors under the automatic route. Earlier, these were allowed only with government approval.
The government also decided to ease policies relating to foreign investments in a domestic company that is engaged in only investing in the capital of other Indian companies and where up to 100% FDI with prior government approval is allowed. If these activities are regulated by any financial sector regulator, foreign investment up to 100% under automatic route will be allowed; and if they are not regulated by any financial sector regulator fully, foreign investment up to 100% will be permitted under government approval, subject to conditions including minimum capitalisation requirement.
Commerce and industry minister Suresh Prabhu said the reforms will liberalise and simplify the FDI policy and provide ease of doing business in the country. “It has been felt that the country has potential to attract far more foreign investment which can be achieved by further liberalising and simplifying the FDI regime. Accordingly, the government has decided to introduce a number of amendments in the FDI Policy,” the industry ministry said in a statement. Goldie Dhama, partner (regulatory) at PwC India, said the liberalisation in single-brand retail trading sector is aimed at ensuring greater ease of doing business and should stimulate foreign investments. “Allowing incremental sourcing undertaken by overseas group companies to be counted towards the 30% sourcing commitment for the initial five years will provide the single-brand retail trading companies the flexibility and time to align their retail and sourcing business.”
Sameer Sah, associate partner at Khaitan & Co said non-cash consideration as a permissible consideration for the issue of shares will give companies flexibility in their arrangements with investors. “Valuation and other procedures will, of course, have to be suitably followed,” he said. Kameswara Rao, partner at PwC, said the decision to allow 49% FDI under automatic route for power exchanges should help electricity bourses secure direct funding to develop new generation products. “In particular, there’s opportunity to serve buyers who are keen on renewable energy but with the risk of non-availability or seasonality suitably hedged,” Rao added