1. India opens FDI floodgates; Apple to Qatar Airways gain, but grey areas remain

India opens FDI floodgates; Apple to Qatar Airways gain, but grey areas remain

IN what showed a mindset shift among India’s policymakers, the government on Monday opened the floodgates for foreign direct investment (FDI) by easing the terms for nine sectors

By: | New Delhi | Published: June 21, 2016 6:38 AM
Showing scant signs of legacy inhibitions, it virtually paved the way for even foreign airlines to acquire their Indian counterparts, removed the condition of domestic access to state-of-the-art technology for 100% FDI in the defence sector and put in abeyance the fractious 30% local sourcing norm for FDI in single-brand retail of advanced-technology products. Showing scant signs of legacy inhibitions, it virtually paved the way for even foreign airlines to acquire their Indian counterparts, removed the condition of domestic access to state-of-the-art technology for 100% FDI in the defence sector and put in abeyance the fractious 30% local sourcing norm for FDI in single-brand retail of advanced-technology products. (PTI)

In what showed a mindset shift among India’s policymakers, the government on Monday opened the floodgates for foreign direct investment (FDI) by easing the terms for nine sectors. Showing scant signs of legacy inhibitions, it virtually paved the way for even foreign airlines to acquire their Indian counterparts, removed the condition of domestic access to state-of-the-art technology for 100% FDI in the defence sector and put in abeyance the fractious 30% local sourcing norm for FDI in single-brand retail of advanced-technology products.

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Despite the local pharma industry’s oft-expressed fear of being swamped by Big Pharma, foreign firms can now take majority (up to 74%) ownership in Indian drugmakers via the automatic route, which could again catalyse big-ticket M&A activity in the sector.

With the relaxations in the aviation sector, even a foreign airline could acquire 100% ownership in an India airline company by working in concert with a related party, according to some analysts. For example, a Qatar Airways could acquire a GoAir by directly picking up a 49% in the Indian firm and lapping up the balance equity through the West Asian nation’s sovereign wealth fund, Qatar Investment Authority.

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Analysts, however, said the government seems to have tightened the sourcing rule in single-brand retailing, instead of giving a blanket exemption from such a rule for entities having “cutting-edge” technology, as was the case earlier. For instance, Apple will be exempted from the local sourcing rule for three years and have a relaxed sourcing regime for another five years if it wants to set up its own retail store, as its technology has already been described as “cutting edge” by a government panel. However, the company will still have to start local sourcing from the fourth year itself, thanks to the insistence of the finance ministry, which wanted that the Make in India programme get a boost. Similarly, Chinese company LeEco will be subjected to the same conditions if its claim of having “cutting edge” technology is endorsed by the panel headed by department of industrial policy and promotion secretary Ramesh Abhishek. However, another Chinese smartphone maker, Xiaomi, which recently withdrew its application for such a waiver, will have to comply with the mandatory 30% sourcing rule from the beginning should it wish to set up its own retail store.

Commenting on the new FDI policy for airlines, Amber Dubey, partner and India head of aerospace and defence at KPMG in India, said: “The avoidable controversies on settling ‘ownership and control’ issue is now over. Foreign airlines can now focus on the customers and competition rather than wasting time on legal and regulatory issues.”

“The likely increase in competition will bring down prices and enhance air penetration in India, both international and domestic. Indian carriers can now look for enhanced valuations in case they wish to raise funds or go for partial or complete divestment,” he added.

Calling the new norms a “bit tricky”, Amrit Pandurangi, senior director, Deloitte Touche Tohmatsu India, said, “Foreign airline investment is restricted to 49% and FDI investment in this sector has been opened up to 100%, so if the beyond the portion of the equity is by a related entity, then that needs to be tested.”

Among domestic airlines, the Rahul Bhatia-controlled Interglobe Enterprises holds close to 43% in IndiGo, Ajay Singh has a 60% stake in SpiceJet and Naresh Goyal holds 51% in Jet Airways. While Tata Sons holds 51% in both Vistara Airlines and AirAsia India, GoAir is wholly owned by the Wadia Group.

In defence, the decision to scrap the condition of access to “state-of-the-art technology” for FDI beyond 49% (through government route) will make it easier for foreign investors to invest in India. Already, Russian firm Kalashnikov is reportedly looking for local partners for manufacturing in India. Similarly, Swedish defence major Saab is learnt to be looking at more than 49% FDI in defence in its joint venture with a local partner to make the Gripen aircraft in India.

The government’s move to allow 100% FDI through the automatic route (earlier it was up to just 49%) in the broadcast carriage industry, comprising teleports, cable, direct-to-home (DTH) players, HITS (head-end-in-the sky) and mobile TV operators will provide a breather to the cable industry which has been struggling with the process of digitalisation of cable TV. The government has also allowed 74% FDI (49% under automatic route and through government approval beyond this ceiling) in private security agencies. Earlier, only 49% of FDI through government route was allowed.

Also allowed now is 100% FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture under the automatic route under controlled conditions. It has been decided to do away with this requirement of ‘controlled conditions’ for FDI in these activities.

“For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, it has been decided that approval of Reserve Bank of India or separate security clearance would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted,” a PMO statement said..

Monday’s is the second largest FDI liberalisation initiative by the Modi government, after the steps taken in November 2015. Prime Minister Narendra Modi tweeted: “In two years, Govt brings major FDI policy reforms in several key sectors… India now the most open economy in the world for FDI; most sectors under automatic approval route.” He added: “Today’s FDI reforms will give a boost to employment, job creation & benefit the economy.”

In what seemed to indicate that the government’s intention was indeed to let foreign airlines acquire Indian firms and thereby augment their capital and fleet strength for the benefit of air travellers, economic affairs secretary Shaktikanta Das said that Monday’s reforms in the sector were a “game changer”.

India’s FDI inflows increased to $55.5 billion in FY16 from $36 billion in FY14. Net FDI inflows stood at $36 billion in FY16 compared with $32.6 billion in FY15.

Commerce and industry minister Nirmala Sitharaman, however, rejected assumptions that the government decided to announce so many FDI policy reforms in one go to divert public attention from RBI governor Raghuram Rajan’s decision to not continue at the central bank after his current tenure ends on September 4. The reforms are a result of months of deliberations among various departments and are not announced in a hurry to divert attention, she affirmed.

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