FDI panel suggests easing of investment caps

Written by Arup Roychoudhury | New Delhi | Updated: Jun 27 2013, 11:15am hrs
The panel led by economic affairs secretary Arvind Mayaram, which reviewed foreign investment limits in various industries, has recommended opening up 12 sectors for full foreign ownership and allowing 74% foreign ownership with Indian oversight in four sectors. The panel also advised the government to give automatic clearance for up to 49% foreign investment in five businesses.

A discussion paper submitted by the Mayaram committee to finance minister P Chidambaram on June 17 recommended that raising foreign ownership caps in certain sectors should come with stringent security riders to protect national interests.

The panel suggested modifying sectoral caps under three broad categories. In sectors where foreign control cannot be allowed, up to 49% foreign direct investment (FDI) will be permitted. In these businesses, the Indian partner could have a majority stake, and hence control. In the sectors where foreign ownership and control is permitted with a certain amount of Indian oversight and participation, up to 74% FDI will be permitted. Lastly, in sectors where the issue of control or ownership is immaterial, 100% FDI will be permitted. (See table)

In the last category, investment in sectors like telecom, mining and mineral separation, single-brand retail, pharmaceutical sector, holding companies, asset reconstruction companies and the tea sector will require approval by the foreign investment and promotion board (FIPB). Other sectors like broadcasting carriage, printing, uplinking and downlinking of non-news channels, existing airport projects and non-scheduled aviation will not need FIPB approval.

The classification is based on recommendations by the department of industrial policy and promotion (DIPP). An increase to 100% FDI in telecom will help global players like US' AT&T and Verizon to set up wholly-owned units in India. This will also help players like Vodafone and Telenor, which have controlling stakes in their domestic units, to completely own those units.

The recommendations, if accepted, will make it easier for global airport operators like Singapore's Changi, Malaysia's MAHB, and Switzerland's Flughafen Zrich AG to invest in existing airports like Mumbai, Delhi, Bangalore, Hyderabad, among others, without approval. This will help local operators like GMR and GVK sell stake and reduce their high-debt burdens.

On the other hand, for sectors like pharmaceutical industries, where there are no significant greenfield proposals coming in, future investments may prove to be tougher, as the Mayaram report does not differentiate between greenfield and brownfield investments. Currently, 100% foreign ownership is allowed in pharmaceuticals but investments into only greenfield projects could be made through the automatic route, while brownfield projects require approval.

As per the classification recommended by the panel, sectors where FDI is capped at 49% include broadcasting news, print media, commodity exchanges, stock exchanges, depositories and power exchanges, defence and private security agencies. Due to security reasons, the last two sectors will require FIPB approval, while the other sectors could be invested in, through the automatic route.

The sectors where some Indian oversight is required and up to 74% FDI can be allowed include private sector banking, multi-brand retail, satellite establishment and operations, and airlines. These sectors will require the approval of FIPB.

Earlier this month, Chidambaram had said that the government will announce a series of steps to revive investment, and increase foreign inflows coming into India, to finance a ballooning current account deficit and stabilizing a depreciating currency. Currently, FDI policy is governed by press notes 2, 3 and 4 put out by DIPP, the nodal department under commerce and industry ministry in 2009. The current definition of 'control' only looks at appointing majority board members as an indicator of control.

The finance ministry, in consultation with the department of industrial policy and promotion (DIPP), is in the process of defining control in companies. The two sides have met and agreed upon the broad contours of the definition, which would be in sync with the new Companies Bill. Under it, control is broadly defined as the right to appoint majority of the directors or to control the management.