In what showed a mindset
shift among India’s policymakers, the government on Monday opened the
floodgates for foreign direct investment (FDI) by easing the terms for nine
sectors. Showing scant signs of legacy inhibitions, it virtually paved the way
for even foreign airlines to acquire their Indian counterparts, removed the
condition of domestic access to state-of-the-art technology for 100% FDI in the
defence sector and put in abeyance the fractious 30% local sourcing norm for
FDI in single-brand retail of advanced-technology products.
Despite the local pharma industry’s oft-expressed fear of being
swamped by Big Pharma, foreign firms can now take majority (up to 74%)
ownership in Indian drugmakers via the automatic route, which could again
catalyse big-ticket M&A activity in the sector.
With the relaxations in the aviation sector, even a foreign
airline could acquire 100% ownership in an India airline company by working in
concert with a related party, according to some analysts. For example, a Qatar
Airways could acquire a GoAir by directly picking up a 49% in the Indian firm
and lapping up the balance equity through the West Asian nation’s sovereign
wealth fund, Qatar Investment Authority.
Analysts, however, said the government seems to have tightened
the sourcing rule in single-brand retailing, instead of giving a blanket
exemption from such a rule for entities having “cutting-edge” technology, as
was the case earlier. For instance, Apple will be exempted from the local
sourcing rule for three years and have a relaxed sourcing regime for another
five years if it wants to set up its own retail store, as its technology has
already been described as “cutting edge” by a government panel. However, the
company will still have to start local sourcing from the fourth year itself,
thanks to the insistence of the finance ministry, which wanted that the Make in Indiaprogramme get a boost. Similarly, Chinese company
LeEco will be subjected to the same conditions if its claim of having “cutting
edge” technology is endorsed by the panel headed by department of industrial
policy and promotion secretary Ramesh Abhishek. However, another Chinese
smartphone maker, Xiaomi, which recently withdrew its application for such a
waiver, will have to comply with the mandatory 30% sourcing rule from the
beginning should it wish to set up its own retail store.
Commenting on the new FDI policy for airlines, Amber Dubey,
partner and India head of aerospace and defence at KPMG in India, said: “The
avoidable controversies on settling ‘ownership and control’ issue is now over.
Foreign airlines can now focus on the customers and competition rather than
wasting time on legal and regulatory issues.”
“The likely increase in competition will bring down prices and
enhance air penetration in India, both international and domestic. Indian
carriers can now look for enhanced valuations in case they wish to raise funds
or go for partial or complete divestment,” he added.
Calling the new norms a “bit tricky”, Amrit Pandurangi, senior
director, Deloitte Touche Tohmatsu India, said, “Foreign airline investment is
restricted to 49% and FDI investment in this sector has been opened up to 100%,
so if the beyond the portion of the equity is by a related entity, then that
needs to be tested.”
Among domestic airlines, the Rahul Bhatia-controlled Interglobe
Enterprises holds close to 43% in IndiGo, Ajay Singh has a 60% stake in SpiceJet and
Naresh Goyal holds 51% in Jet Airways. While Tata Sons holds 51% in both
Vistara Airlines and AirAsia India, GoAir is wholly owned by the Wadia Group.
In defence, the decision to scrap the condition of access to
“state-of-the-art technology” for FDI beyond 49% (through government route)
will make it easier for foreign investors to invest in India. Already, Russian
firm Kalashnikov is reportedly looking for local partners for manufacturing in
India. Similarly, Swedish defence major Saab is learnt to be looking at more
than 49% FDI in defence in its joint venture with a local partner to make the
Gripen aircraft in India.
The government’s move to allow 100% FDI through the automatic
route (earlier it was up to just 49%) in the broadcast carriage industry,
comprising teleports, cable, direct-to-home (DTH) players, HITS
(head-end-in-the sky) and mobile TV operators will provide a breather to the
cable industry which has been struggling with the process of digitalisation of
cable TV. The government has also allowed 74% FDI (49% under automatic route
and through government approval beyond this ceiling) in private security
agencies. Earlier, only 49% of FDI through government route was allowed.
Also allowed now is 100% FDI in animal husbandry (including
breeding of dogs), pisciculture, aquaculture and apiculture under the automatic
route under controlled conditions. It has been decided to do away with this
requirement of ‘controlled conditions’ for FDI in these activities.
“For establishment of branch office, liaison office or project
office or any other place of business in India if the principal business of the
applicant is Defence, Telecom, Private Security or Information and
Broadcasting, it has been decided that approval of Reserve Bank of India or
separate security clearance would not be required in cases where FIPB approval
or license/permission by the concerned Ministry/Regulator has already been
granted,” a PMO statement said..
Monday’s is the second largest FDI liberalisation initiative by
the Modi government, after the steps taken in November 2015. Prime Minister Narendra Modi tweeted:
“In two years, Govt brings major FDI policy reforms in several key sectors…
India now the most open economy in the world for FDI; most sectors under
automatic approval route.” He added: “Today’s FDI reforms will give a boost to
employment, job creation & benefit the economy.”
In what seemed to indicate that the government’s intention was
indeed to let foreign airlines acquire Indian firms and thereby augment their
capital and fleet strength for the benefit of air travellers, economic affairs
secretary Shaktikanta Das said that Monday’s reforms in the sector were a “game
changer”.
India’s FDI inflows increased to $55.5 billion in FY16 from $36
billion in FY14. Net FDI inflows stood at $36 billion in FY16 compared with
$32.6 billion in FY15.
Commerce and industry minister Nirmala Sitharaman, however,
rejected assumptions that the government decided to announce so many FDI policy
reforms in one go to divert public attention from RBI governor Raghuram Rajan’s decision to not continue at the central bank
after his current tenure ends on September 4. The reforms are a result of
months of deliberations among various departments and are not announced in a
hurry to divert attention, she affirmed.
Courtesy The Financial Express
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