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Business News/ Politics / Policy/  Cabinet eases foreign investment norms

Cabinet eases foreign investment norms

Govt clarifies clauses for retail; higher caps for insurance, telecom and defence; definition of 'control' modified

In case of PSU oil refineries, commodity bourses, power exchanges, stock exchanges and clearing corporations, FDI would be allowed up to 49% under automatic route as against current routing of the investment through FIPB. Photo: Pradeep Gaur/MintPremium
In case of PSU oil refineries, commodity bourses, power exchanges, stock exchanges and clearing corporations, FDI would be allowed up to 49% under automatic route as against current routing of the investment through FIPB. Photo: Pradeep Gaur/Mint

New Delhi: The Union cabinet has made it easier for foreign supermarket chains to open for business, and approved increases in foreign direct investment (FDI) limits in the telecom, defence and insurance sectors, pressing ahead with efforts to attract overseas capital to both finance a widening current account deficit, and revive the India story that has taken a beating in the past 18 months.

The moves come ahead of the monsoon session of Parliament starting on 5 August, in which the principal opposition Bharatiya Janata Party (BJP) has signalled it would cooperate with the ruling Congress-led United Progressive Alliance (UPA) in getting legislative business done.

Although India allowed foreign supermarkets to open in India through FDI in so-called multi-brand retail in September 2012, foreign retailers have preferred to play it safe, waiting for clarifications on some sticky issues. Thursday’s meeting provided some of those clarifications.

For one, the stipulation that 50% of the investment made by a foreign retailer will have to be in the back-end only applies to the minimum foreign investment limit of $100 million, and not the total investment.

For another, the stipulation that foreign retailers in India will have to source at least 30% of their requirements from small companies (with an investment in plant and machinery of up to $1 million) has been relaxed, with the definition now being extended to companies with investments in plant and machinery of up to $2 million. It has been made applicable at the “first engagement with the retailer", meaning that if the small firms expand, the supermarket chains will not have to hunt for new small firms to meet the sourcing requirement.

The government has also clarified that sourcing from agricultural cooperatives and farmers’ cooperatives will be considered in this category. “The procurement requirement will have to be met, in the first instance, as an average of five years’ total value of the manufactured/processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis," the government said in a statement.

Finally, the current rule that foreign supermarkets chains can open stores only in cities with a minimum population of one million has been removed. States now have the freedom to identify even smaller cities where they may wish to allow such stores.

The clarifications come after representatives of Wal-Mart Stores Inc., Tesco Plc, Carrefour SA and Groupe Auchan SA met commerce and industry minister Anand Sharma separately over the past few months, and raised their concerns.

The clarifications, though, might not set off a rush among foreign retailers to enter India.

An executive with a foreign retailer said companies are unlikely to make substantial investments until elections scheduled in 2014 are over and a new government is in place—implicitly articulating fears that if a different government comes to power, it may change the retail policy.

Indeed, Communist Party of India (Marxist) chief Prakash Karat has said that the next government could reverse decisions taken by the current one on foreign investment.

“Investments will only be gradual and retailers will take time," said Anil Talreja, a partner with Deloitte Haskins and Sells .

Most retailers said they were still understanding the implications of the policy moves. A spokesperson for British retailer Tesco said the company welcomed the changes and was “in the process of reviewing the conditions".

The cabinet also cleared 100% FDI in the telecom and defence sectors and proposed to increase FDI in insurance to 49% from 26%, although this will require new legislation. It also allowed FDI through the automatic route  in several sectors—petroleum and natural gas, commodity exchanges, power exchanges, and stock exchanges.

It also raised the limit for FDI in asset reconstruction companies to 100% from 74% and credit information companies from 49% to 74%. In defence, Sharma said in a conference after Thursday’s cabinet meeting that all investments up to 26% needs approval from the Foreign Investment Promotion Board (FIPB). FDI above that level will be approved by the cabinet committee on security on a case-by-case basis.

The cabinet committee on economic affairs also modified the definition of “control" in case of FDI in a company to align it with that of the definition by the securities market regulator and the Companies Bill.

“Control" of a company will now be defined by the “right to appoint a majority of directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholder’s agreements or voting agreements", Sharma said.

The new definition will be applicable prospectively. Currently, a company is said to be "controlled" by resident Indian citizens if they have the power to appoint a majority of the directors in the company. This decision comes just days after FIPB cleared the controversial Jet Airways (India) Ltd-Etihad Airways PJSC deal, where one of the challenges was the issue of control.

By aligning the control definition with the Securities and Exchange Board of India’s takeover regulations and the Companies Bill, 2012, to include management rights or shareholders agreements, the government has tried to plug the loophole in the existing definition, said Dev Raj Singh, executive director, tax and regulatory services at audit firm EY Llp.

To further push the government’s legislative reforms agenda, finance minister P. Chidambaram is set to meet leaders of the opposition parties on Saturday to evolve a consensus on increasing the FDI cap in the insurance sector. The Insurance Amendment Bill has been pending in the Rajya Sabha since 2008.

Chidambaram has said the government will look to first push the Pension Fund Regulatory Development Authority Bill in Parliament since it thinks there are better chances of passing that than the insurance legislation. The pension bill only states that the FDI ceiling will be at par with that in the insurance sector.

BJP leaders said the government’s plans for legislation in the monsoon session were ambitious.

“The government has called for a very short session of only 16 days out of which four are Fridays reserved for the private members’ Bills. For legislative business effectively, there will be only 12 working days and the government has listed 64 Bills. The ambition seems to be too high. Let’s see how the government achieves this miracle in such a short time," Arun Jaitley, leader of the opposition in the Rajya Sabha, told reporters after attending an all-party meeting convened by Lok Sabha speaker Meira Kumar.

The meeting was a part of the Lok Sabha speaker’s attempts to ensure Parliament functions smoothly during the monsoon session, which will end on 30 August.

The BJP, which has disrupted the last few Parliament sessions over corruption controversies, said it will allow the Parliament to function if the Congress-led United Progressive Alliance (UPA) government shows a constructive attitude.

BJP leader Jaitley said his party would like to raise issues such as the creation of Telangana state, national security, the state of the economy, and the weakening of the Indian currency against the dollar.

The UPA government, which is struggling to revive its popularity and improve its image ahead of the next Lok Sabha election due in early 2014, is planning to table several welfare and reform measures during the session.

The monsoon session assumes significance as it is seen by many political observers as the last opportunity for the UPA to push its legislative business before the 15th Lok Sabha is dissolved.

The UPA is expected to table the Food Security Bill—an ordinance is in place now—in the first days of the session. While the BJP demanded that the Bill on formation of Telangana be brought in the monsoon session itself for consideration and passage, the government said it will have to follow the legal process under which a resolution is required to be passed by the Andhra Pradesh assembly first.

The other key Bills expected to be on the government’s agenda for the session include the land acquisition Bill; the whistleblowers’ protection Bill; the Prohibition of Employment as Manual Scavengers and their Rehabilitation Bill, 2012; the Indian Medical Council (Amendment) Bill, 2013; the Pension Fund Regulatory and Development Authority Bill, 2011; and the Companies Bill, which has been passed by the Lok Sabha and is pending before the upper house.

Suneera Tandon, Aman Malik, Remya Nair and Shauvik Ghosh contributed to this story.

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Updated: 02 Aug 2013, 10:17 AM IST
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