In a bold move aimed at attracting foreign capital in its fast-expanding economy, the Union government has relaxed foreign ownership norms in six businesses including aviation, commodity exchanges and oil refining, braving opposition from Communist allies in a year of 10 state elections.
The decision, taken at a Wednesday meeting of the Union cabinet, eases foreign investment norms in cargo and charter airlines, helicopter services, credit information companies, titanium mining, industrial parks and construction development projects, where foreign investors—both partners and financial—are permitted with equity caps ranging from 0% to 49%.
“The move will help the respective sectors get not only the funds, but technological knowledge, which will further boost the growth in these sectors,” said N.R. Bhanumurthy, an economist at the Institute of Economic Growth in the Capital.
RAISING THE CAP (Graphic)
This fiscal year, the government has set a target of $30 billion, or Rs1.18 trillion, for so-called foreign direct investments (FDI), the category under which equity contributions from overseas companies or partners is clubbed, to help keep the economy expanding at 8-9%. FDI flows into India grew 35% between April and October, the latest data available, from the year-ago period, to Rs37,745 crore.
Wednesday’s announcement had more to do with removing bottlenecks than a major revamp of foreign investment policy in Asia’s third-largest economy. In commodity exchanges, for instance, the cabinet approved up to 49% foreign investment including 26% of FDI—for the first time clearly defining limits on foreign ownership in such businesses.
At least two commodity exchanges in the country already have foreign investors backing them. India’s biggest commodity exchange Multi Commodity Exchange (MCX) has up to 26% equity held by investors including Fidelity Fund Mauritius Ltd, and Citigroup Inc., Merrill Lynch Holdings, Passport India Investments Mauritius Ltd and GLG Financials Fund.
While allowing foreign investment in the exchanges, New Delhi has imposed the condition that no single investor may hold more than 5%. As a result, some foreign investors such as Fidelity Fund, which holds 9% in MCX, Inter-Continental Exchange that owns 8% in the National Commodity and Derivatives Exchange?(NCDEX) and Goldman Sachs and Co., which owns 7% in NCDEX, may have to pare holdings, though the overall foreign holdings in the bourses are within the approved limit.
Despite this restriction, P.H. Ravikumar, managing director NCDEX, said Wednesday’s decision was imperative for the growth and strengthening of commodities trade in the country. “The exchanges now can choose and decide on the mix of investment needed. Primarily, the investment will be for raising capital, technological upgradation, product development and risk management,” he said.
The government, seemingly sensitive of opposition to the decision, had moved cautiously in most cases. In aviation for instance, the cabinet’s spokesman, information and broadcasting minister Priya Ranjan Dasmunsi, highlighted that the government was not raising the foreign ownership cap in domestic passenger air services. It decided to increase the foreign investment limit on chartered and cargo airlines to 74% from 49%. Similarly, ground handling services will also be allowed to be 74% foreign-owned.
Mohan Prakash, a spokesman for the Congress, which is the main party in the ruling United Progressive Alliance coalition government, said: “The government will have to keep a close watch on mining, civil aviation and petroleum investments from abroad.”
Still, late on Wednesday, Communist allies did little to veil their views on the cabinet decision. Communist Party of India leader Gurudas Dasgupta said the FDI proposals would be “opposed lock, stock and barrel.” “We see no room for further relaxation of the foreign investment norms in these sectors,” he said. The Communist Party of India (Marxist) recently criticized the decision to allow 100% FDI in mining and any foreign investment in retail trade.
On Wednesday, the government went a step further and extended 100% foreign ownership in mining companies to titanium mining, where an earlier classification of the mineral as “atomic” prevented such foreign investment.
Flight training institutes and aircraft maintenance facilities and other helicopter and sea plane services can also have 100% foreign investment. “We have to build training, cargo (services), helicopter operations, infrastructure... These decisions will boost the neglected sectors (of Indian aviation),” said civil aviation minister Praful Patel. An investment of about $120 billion, he expects, will be made in the country’s aviation sector in the next decade creating many hundreds of thousands jobs.
In petroleum, the government has done away with the condition that a foreign investor in trading and marketing companies must divest up to 26% equity in favour of an Indian partner or the public, within five years.
In the oil refining business, the government has decided to raise the foreign investment equity cap from 26% to 49%, though prior approval of the Foreign Investment Promotion Board, a government body that approves foreign investment in some businesses, will be needed. Last year, steel baron Lakshmi Mittal of the Mittal Arcelor group was allowed to invest 49% in Hindustan Petroleum Corp. Ltd’s Bathinda refinery as a one-time exception.
The government has also decided to exempt FDI in industrial parks from conditions that relate to minimum size and market capitalization, as well as impose a three-year lock-in period during which the foreign investor may not exit the venture.
The FDI limit in credit information companies that keep track of borrowers’ credit history has been revised to 49%, subject to regulatory approvals, the government added.
(Sangeeta Singh, Tarun Shukla, Udit Misra, Siddhartha Sarma, and Ajayan in Kochi; Bloomberg’s Bibhudatta Pradhan and Saikat Chatterjee, and Surojit Gupta of Reuters also contributed to this story.)