In a big reform move, government eases FDI norms in key sectors

By TEAM VCC

  • 10 Nov 2015

The government sought to assuage investors by easing norms for foreign direct investment (FDI) in a clutch of sectors, amid apprehensions that key pending reforms would be tougher to push through in the light of the state elections results in Bihar.

BJP that won the national elections last year, lost out in the eastern state, which pushes back its plans to get control of the upper house of parliament where it does not enjoy majority seats.

The government said it has put FDI approvals for a set of sectors and transactions (see chart) on the automatic approvals route as part of its ease of doing business initiatives besides increasing sectoral caps in several areas.

Broadcasting

Among the major changes include 100 per cent FDI in part of broadcasting space (up to 49 per cent in automatic approval and for more stake through government approval) including DTH, mobile TV and cable networks besides putting FDI approval in uplinking and downlinking of non-news TV channels under automatic route. For FM radio and news TV channels, it had hiked the FDI ceiling to 49 per cent from 26 per cent currently.

Realty

The government has also decided on several measures to boost real estate sector. It has scrapped the area restriction of floor area of 20,000 square metres in construction development projects and minimum capitalisation of $5 million to be brought in within six months of the commencement of business, for attracting FDI. Just last year, it had broughtdown the restrictions from 50,000 sq mtrs and minimum capitalisation of $10 million.

It has also said that each phase of the construction development project would be considered as a separate project for the purposes of FDI policy.

In another big development that would allow easier exits for realty PE firms, it said a foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment has been completed.

Further, transfer of stake from one foreign investor to another such entity, without repatriation of investment will neither be subject to any lock-in period nor to any government approval.

“The policy changes, especially the clarification on leasing/renting of completed assets not constituting real estate activity, will fuel the appetite in the Indian and international investment community for investments in completed commercial buildings,” said Kalpesh Maroo, Partner, BMR & Associates LLP.

Private banks

The government has also decided to introduce full fungibility of foreign investment in private banks. Accordingly, portfolio investors can now invest up to sectoral limit of 74 per cent, provided that there is no change of control and management of the investee company.

Parag Jariwala, vice president– Institutional Research, Banking and Financial services, Religare Capital, said among private sector banks Kotak Mahindra will benefit as it has already hit the foreign portfolio investment limit.

“Though there are no immediate benefits for other private sector banks as they are outside FII restriction as of now, this is positive for private sector banks like YES and Axis Bank - out of MSCI index as FII holding is near the maximum permitted so limited room for FIIs to buy. Once limits are merged they have better chance to get included in MSCI for longer period,” he added.

Retail, M&As, others

Among other sectors, the government has expanded the scope of FDI in plantations to include coffee and rubber, among a few others. Currently full foreign ownership is allowed only for tea plantations in the country.

The new rules also ease FDI norms for investments by non-resident Indians (NRIs) and foreign investment routed through Limited Liability Partnerships.

In another big move, it has decided to relax local sourcing norms for FDI in retail and said in case of ‘state-of-art’ and ‘cutting edge technology’ sourcing norms can be relaxed subject to government approval.

It has also allowed firms that already have clearance for single brand retail to also sell online or operate e-commerce properties.

Further manufacturers can sell product through their own e-commerce ventures without government approval.

As for FDI related to inbound acquisitions, it noted that as per the FDI policy establishment and ownership or control of the Indian company in sectors/activities with caps requires government approval.

This provision has now been amended to provide that approval will be required if the company is operating in sectors/activities which are under government approval route rather than capped sectors.

“Further no approval of the government is required for investment in automatic route sectors by way of swap of shares,” the government note added.

Meanwhile, it has enhanced the scope of approvals which can be directly handled by FIPB, the nodal body monitoring foreign investment in the country to cover bigger investment proposals. FIPB is now allowed to approve investment proposals worth up to Rs 5,000 crore ($755 million) as against the current limit of Rs 3,000 crore.

Investment proposals that are larger in size are outside the purview of FIPB and are looked after by Cabinet Committee on Economic Affairs (CCEA). These proposals are subject to more scrutiny.

Indeed, the government had raised the scope of FIPB's power only early this year allowing it to see proposals worth Rs 3,000 crore against the previous limit of Rs 1,200 crore. FIPB meets almost every month and more FDI proposals under it would mean faster clearances.

“The crux of these reforms is to further ease, rationalise and simplify the process of foreign investments in the country and to put more and more FDI proposals on automatic route instead of Government route where time and energy of the investors is wasted,” a press release by ministry of commerce and industry stated.

In another move, it has raised the limit on portfolio investment and ceiling on foreign venture capital investment in defence sector from 24 per cent to 49 per cent.

The government has also clarified FDI norms for regional airlines and for non-scheduled air service operators.

For full note on the FDI reforms click here.