New Delhi: In a bold decision that could lead to a political backlash, the Congress-led United Progressive Alliance (UPA) has, with a few caveats, allowed 100% foreign direct investment (FDI) in defence and telecom.
The decision, part of a package that not only raised FDI limits in select sectors and eased red tape by allowing more investments through the automatic route, comes at a time when the government is desperate to demonstrate its commitment to economic reforms and improve dollar inflows to shore up the rupee.
The government approved proposals to increase FDI limits in 12 sectors as proposed by the Arvind Mayaram commitee, including crucial ones such as defence and telecom, commerce and industry minister Anand Sharma said after a meeting of the key ministers concerned at the Prime Minister’s residence late Tuesday night.
The department of industrial policy and promotion (DIPP) made a presentation and a consensus was reached on the twelve sectors, Sharma said. FDI can come in through the automatic route or after approval by the Foreign Investment Promotion Board (FIPB).
However, Sharma told Mint that any hike in the FDI cap in civil aviation and multi-brand retail is unlikely. “In civil aviation, we have just eased the cap. In multi-brand retail, our focus is to provide greater clarity in the policy which will be done through an amendment of the policy by the Cabinet,” he added.
Sharma said Tuesday’s decisions have been taken on the basis of consensus among the ministers present and a Cabinet note to this effect will be moved soon, which will be taken up next week. He also said that a new definition of management control will also be taken up by the Cabinet soon.
The aviation ministry told the meeting that it does not need any more relaxations on FDI norms in any of its areas including airlines, airports and other related aviation services such as charters, which had been proposed by the Mayaram panel. The panel had said it wanted FDI caps to be lifted to 74% in airlines. In September, the government allowed overseas airlines to invest up to 49% in local carriers for the first time, while retaining the FDI limit.
Sharma also said the proposal for a hike in the FDI cap in news media was not taken up for discussion. The ministry of information and broadcasting has sought the views of the Press Council of India and the Telecom Regulatory Authority of India on the matter.
FDI in the telecom services sector was increased from 74% to 100%, but all investments above 49% will continue to be routed through FIPB. Senior government officials had allayed fears that the home ministry would oppose this move on security grounds.
The telecom service providers are the ones that have to comply with FDI norms and not the equipment that is being used by them, a senior government official said. The government was working on the equipment aspect through the domestic manufacturing policy and the preferential market access policy, the official said.
The increased limits are expected to bring in around Rs.10,000 crore of investment for the sector. UK-based Vodafone Group Plc and Russia’s Sistema JSFC are expected to be the first to take advantage of the new FDI caps.
“The much-needed policy decision is a very positive development for the entire industry. With fresh foreign direct investments coming in, this would further catalyze growth and also the process of proliferation of telecom services across the country,” a Sistema Shyam TeleServices Ltd (SSTL) spokesperson said. Sistema and the Russian government together hold 74% in SSTL.
A spokesperson for Vodafone Plc. declined to comment on the development.
FDI in defence production that is under 26% will continue to be approved by FIPB. Anything above that and involving what the government defines as “state-of-the-art” technology will need to be approved by the Cabinet Committee on Security (CCS).
Since no cap is mentioned above 26%, it is implicit that FDI up to 100% has been allowed.
“The extant policy makes it clear that up to 26% is allowed through the FIPB route and beyond 26%, to access state-of-the-art technology, it is left to the discretion of CCS,” a Union minister said speaking under condition of anonymity.
Defence minister A.K. Antony has been opposed to hiking the FDI limit in defence production citing security concerns.
“It’s an excellent move,” retired air chief marshal Fali Homi Major said. “We want to be indigenous and we must. When I say indigenous, the product should be Indian and the intellectual propriety rights should be Indian. But that does not mean you can’t take foreign assistance with foreign technology—that is needed.”
Major said this move will allow international companies into the sector and dismantle the public sector’s monopoly, besides encouraging offsets which form a substantial chunk of major defence contracts.
Other sectors that saw changes include petroleum, natural gas and refining where the 49% limit was changed to the automatic route from the FIPB route. For commodity exchanges, power exchanges and stock, exchanges, the existing limit of 49% through the FIPB route—26% FDI and 23% through foreign institutional investors (FIIs)—was eased to the automatic route.
“Allowing automatic route for foreign investment is the single most critical thing about today’s FDI limit enhancement announcement,” said Devraj Singh, executive director, tax and regulatory practice, at global professional services organization EY. He added that the move will give a boost to FDI as most investors are “scared about the current rules and regulations”.
“In any case, 90% of the foreign direct investment is coming to India through automatic route while rest is going through FIPB route,” said Singh.
The insurance sector was given a confidence boost with the FDI limit being raised to 49% from 26% through the automatic route, but this proposal will need parliamentary approval.
Asset reconstruction companies will be allowed 100% FDI, with 49% through the automatic route from the existing 74% through the FIPB route.
P. Rudran, managing director and CEO of Asset Reconstruction Company (India) Ltd, said: “Increased flow of funds in asset reconstruction companies will help the market to mature. Domestic investors are not willing to take up much of a position on distressed assets. If overseas funds are coming in this sector, there will be depth in the distressed assets market. Eventually it is good for the economy as well, given the bad assets situation in Indian banks.”
Credit information companies will be allowed 74% through the automatic route from 49% through the FIPB route. The tea industry, including plantations, continue to be allowed 100% FDI, but now they will be also allowed 49% through the automatic route.
Sharma also said the clause stipulating that foreign-owned tea plantations had to divest 26% to Indian partners within five years would be deleted.
The sectoral cap for single-brand retail remained unchanged at 100%, but 49% has been allowed through the automatic route. Investment above 49% will still require FIPB approval.
Courier firms will be allowed 100% FDI through the automatic route from the existing FIPB route.
Lalit Kumar, partner at law firm J. Sagar Associates, said the step toward partially allowing the automatic route in single-brand retail is a favourable step as the government has seen a positive response on this front with the measures on retail thus far.
Others said the government hadn’t gone far enough on retail.
“The real announcement should have been in multi-brand retail as single-brand is a non-issue since 100% FDI is allowed. The automatic route only takes away a couple of weeks from the process, so no big change at large,” added Arvind Singhal, chairman at consulting firm Technopak Advisors.
Another retail analyst said it didn’t come as a surprise that there was no action on multi-brand retail since the existing cap of 51% hadn’t attracted any investors. “So the chance of investment at 74% (as recommended by the Mayaram committee) would have been equally bleak,” he added on condition of anonymity.
The Bharatiya Janata Party objected to the government taking important decisions without waiting for the monsoon session of Parliament to begin.
“The UPA government has come under pressure and is working under pressure from developed countries. When the Parliament session has been declared, they cannot make any such decision without Parliament’s sanction,” he said.
Communist Party of India (Marxist) general secretary Prakash Karat said his party was against easing FDI limits in any sector. “We don’t approve of this desperation to raise the caps,” Karat said.
Tarun Shukla, Suneera Tandon, Liz Mathew and Anuja in New Delhi, and Anup Roy, Aveek Datta, Sapna Agarwal, Anirudh Laskar and P.R. Sanjai in Mumbai contributed to this story.