In a significant departure from current norms, foreign direct investment (FDI) in some strategic sectors is being moved out of the automatic approval route. A direct fallout of this is that foreign investors in sensitive sectors?including telecom and aviation?will face stricter regulations. The government would make it mandatory for foreign investors to seek government approval before investing in these sectors.
At present, foreign investment up to 49% is allowed through the automatic route in both telecom and aviation, while any investment above that up to a ceiling of 74% in telecom needs the consent of the apex agency that clears foreign investments: the Foreign Investment Promotion Board (FIPB).
Apart from this, the department of industrial policy & promotion (DIPP), the nodal FDI policy body, will also introduce stricter guidelines for foreign investment in sectors that have caps like telecom, retail, defence and aviation. The new stricter guidelines would prevent foreign money entering these sectors through a web of holding companies that may amount to breaching FDI caps.
The proposed step of taking telecom and defence off the automatic route stems from the fact that the government wants to tighten national security in these two sectors.
Last week, FIPB rejected a proposal from L&T to form a joint venture with Dutch company EADS in the defence production sector.
It has also held up a proposal from marquee global brand Gucci to set up single-brand retail outlets in India.
In both cases, FIPB opposed investments through a web of holding companies, which may lead to a breach of FDI caps in defence production and retail. Setting a precedent for all future FDI proposals in capped sectors, FIPB has asked DIPP to put in place a mechanism to ensure that the ceilings are not breached.
In the case of L&T-EADS, the defence ministry argued that the way the corporate arrangement is structured, the venture would breach the 26% FDI cap in defence. The joint venture, a rare case of FDI in defence, proposes to manufacture military avionics, mobile systems, radars and electronic warfare equipment. EADS is to hold 24.5% stake in the venture, while 51% will be with L&T Technologies, a fully-owned arm of L&T.
The two partners plan to float another JV, which will hold 24.5% stake in the defence equipment manufacturing company. The second joint venture will deal in design and engineering services, with L&T holding 51% stake and EADS owning 49%. Since EADS will own 49% in the second venture, which will hold 24.5% in the manufacturing JV, the defence ministry feels the sectoral FDI cap of 26% would be breached.
In Gucci?s case, the board has asked DIPP to clarify that the balance share in Gucci?s Indian subsidiary is Indian ?owned and controlled? and that the FDI cap is not breached. DIPP is also expected to clarify that the intention behind the liberalised policy was not to open up sectors to foreign investment where it is totally prohibited, for example, in multi-brand retail.
Closer watch
* Foreign investors to need govt nod in these sectors
* National security cited as reason for the changes
* Stricter DIPP norms for capped sectors mulled