Ostensibly on a reform overdrive, the NDA government on Tuesday considerably eased foreign investment regulations on several sectors ranging from banking, defence and construction to broadcasting and e-commerce. In what could be a major boost to greenfield investments in the construction sector including in townships as well as residential and commercial projects, the government has allowed foreign investors to invest in projects of all sizes without any minimum threshold for the funds to be brought in.
Also, these investors can exit three years after an investment is made, whether or not the project has been completed, and if the trunk infrastructure has been completed, even prior to that. In short, apart from the bar on making money by dealing in land and immovable property and the three-year lock-in, no restrictions will be there on foreign investors in construction development. Previously, foreign investment in construction was allowed only in projects above 20,000 sq m floor area and subject to condition that at least $5 million should be brought within six months after commencement of business.
Tuesday’s policy relaxations, according to finance minister Arun Jaitley, would address the slowdown in the construction sector. “With interest rates also coming down, I hope the sector will pick up now,” he said. Analysts also described the easing of foreign investment for the construction sector a “big development” that would help revive the economy. Transfer of stake from one non-resident to another without repatriation will be free.
Among other significant changes, the policy of fungibility among different types of foreign investment announced in July has been extended to private-sector banking and defence and the role of the Foreign Investment Promotion Board (FIPB) has been enhanced.
The policy of composite foreign investment cap, announced in July, has been extended to private-sector banking and defence, meaning that foreign portfolio investors (FPIs) and foreign venture capital investors (FVCIs) can now invest up to the respective sectoral foreign investment limits of 74% and 49%. In the case of defence, foreign investment up to the sectoral ceiling of 49% will now be allowed via the automatic route while investments above that, which earlier required to be cleared by the Cabinet Committee on Security provided state-of-the-art technology is brought in, will now require the FIPB’s approval only.
The policy review also relaxed foreign-owned single-brand retailers’ local operations by easing the 30% domestic sourcing requirement. The government will waive this requirement in the case of certain high-technology segments where local sourcing would not be possible. Also, foreign-owned single-brand retailers are now allowed to undertake e-commerce operations. Indian brands that are owned by Indians or Indian entities have been allowed online retailing provided 70% of their products are made in-house and sources “at most 30%” from local producers.
Also, foreign investors in single-brand retail, where 100% FDI is permitted in wholesale cash and carry activities, can now open retail shops as well. Of course, the norms regarding retail operations have to be complied with by the investor separately.
For instance, Swedish company IKEA, which is setting up shop in Hyderabad, will be eligible to sell furniture to Indians through its e-commerce platform.
Similarly, Indian brands are equally eligible for undertaking single-brand retailing and certain extant conditions, including the one that mandates products to be sold under the same brand internationally, will not be made applicable. An Indian manufacturer is now permitted to sell its own branded products in any manner — wholesale, retail, including through e-commerce platforms.
Defence producers have got not only higher FPI and FVCI investment limits but also easier approvals. Tuesday’s policy review clarified that if bringing fresh investments results in ownership pattern or stake sale to a foreigner, government approval would be needed. Ownership change would invite issues of capital gains taxation. “At the moment, domestic defence production is not very significant. While large players are more in need of technology, smaller ones need both funds as well as technology. The revised FDI policy opens up the possibility of greater access to technology. The next reform needed for the growth of this sector is cleaning up the defence procurement procedure,” said Dhiraj Mathur, leader of defence and aerospace practice at PwC.
Private banks are now allowed to have FPI and FVCI investments up to the maximum foreign investment limit of 74%, up from the earlier 49%, provided there is no change in management or control of the investee company. “This will help the private banking sector immensely, especially at a time when India is emphasising on home-grown payment banks and wider penetration of banking services,” said Girish Vanvari, head of tax, KPMG in India.
Chanda Kochhar, MD & CEO, ICICI Bank, said, “The decision to remove the sub-limit restrictions within the overall limit of 74% for private sector banks will provide greater flexibility to banks and investors.”
The government also relaxed sectoral caps and entry routes in the broadcasting sector. FDI limit has been raised from 74% to 100% in teleports, DTH, cable networks, mobile TV, and head-end-in-the-sky broadcasting service (HITS). In these areas, FDI beyond 49% will require government approval. The FDI limit has been raised from 49% to 100% in local cable operators with government approval beyond 49% required. In FM radio and uplinking of news and current affairs TV channels, the FDI limit has been hiked from 26% to 49% under the government route. Also, FDI up to 100% has been allowed under the automatic route for uplinking of non-news and current affairs TV channels and downlinking of TV channels.
According to Anuj Puri, chairman and country head, JLL India, “The latest easing of foreign investment in construction will have a huge positive impact on the housing sector as a whole, but much more so on the affordable housing segment, which was so far not a beneficiary of FDI in any significant manner.”
The foreign investment for non-scheduled airlines and ground services, which is 74%, has been removed and these investments will be via the automatic route. Non-scheduled airlines refer to those that do not follow the timetable established by the civil aviation regulator (DGCA) and can be used for charter services. Nearly 130 non-scheduled operators (NSOP) are believed to be registered with the DGCA and a sizeable chunk is estimated to be used for charter services. Domestic airlines are allowed to use their own crew for ground handling services, but the foreign carriers are required to rope in third-party agencies for the same. The government has also said threshold limit for FIPB approval would be Rs 5,000 crore now, instead of Rs 3,000 crore earlier.
Jaitley said Tuesdays’ decisions have been approved by the PM, who has special authority of Cabinet. These will go for a post-facto approval of the Cabinet.
DIPP secretary Amitabh Kant said the reforms were an “integrated package for the progress of the country”, which were undertaken at the behest of Prime Minister Narendra Modi. “This is a Diwali gift for investors. Everybody had been asking for big-bang reforms. Well, this is the biggest-bang reform ever in FDI policy… Overall, 32 changes have been made to the extant FDI policy,” he said.