Easier FDI norms for small sector likely

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In a move aimed at easing the flow of funds to small-scale industries (SSIs), the Centre proposes to allow foreign direct investment (FDI) into the sector through the automatic route. The relaxation is in line with the government’s efforts to modernise SSIs, given their huge employment potential.

Under existing norms, FDI in sectors reserved for SSIs is currently routed through the Foreign Direct Investment Board (FIPB) and requires prior government permission. Once implemented, regulators such as the Reserve Bank of India need be informed of such investments only after they have been made.

A total of 79 manufacturing activities—including a part of food products, chemicals, plastics and drugs—is reserved for the SSI sector. “There is a need to attract large foreign investments into small and micro industries. We are looking at various steps, including easier fund inflows, into these sectors,” said a senior government official.

As reported by FE in early December, the government is also mulling the removal of the current 24% FDI cap on all companies in the SSI sector. Such units will be allowed to raise foreign equity in accordance with the individual caps governing the sectors in which they operate.

At the moment, any small unit with over 24% FDI loses its SSI status. Once the proposed changes are brought about, the unit would still retain its SSI status with a higher FDI, provided that investment fell within the sectoral cap.

According to government data, there are about 12.8 million small & medium enterprises in India, which produce goods worth over $140 billion. These companies also export goods worth $33 billion, accounting for around a third of India's total exports.