FDI norms eased further; new reforms open up the economy

20 Jun 2016


The government has radically liberalised the country's foreign direct investment (FDI) regime, opening up the automatic route for most sectors of the economy to foreign investors.

The decision, taken at a high-level meeting chaired by Prime Minister Narendra Modi today, aims at providing major impetus to employment and job creation in the country while providing global businesses more space to grow.

With today's announcement, the government has opened up almost all sectors the country's economy, including aviation, e-commerce, defence and pharmaceutical sectors to 100 per cent foreign direct investment

This is the second major reform after the last radical changes announced in November 2015.  Now most of the sectors would be under automatic approval route, except a small negative list. With these changes, India is now among the most open economies in the world for FDI.

Accordingly, it has been decided to raise the FDI limit in scheduled air transport service, including domestic scheduled passenger airline and regional air transport service to 100 per cent - with FDI up to 49 per cent under automatic route and FDI beyond 49 per cent through government approval.

For NRIs, 100 per cent FDI will continue to be allowed under the automatic route. However, foreign airlines would continue to be allowed to invest in the capital of Indian companies operating scheduled and non-scheduled air-transport services up to a limit of 49 per cent of their paid-up capital and subject to the laid-down conditions in the existing policy.

The extant FDI policy on airports permits 100 per cent FDI under automatic route in greenfield projects and 74 per cent FDI in brownfield projects under automatic route. FDI beyond 74 per cent for brownfield projects is under government route.

It has now been decided to allow 100 per cent FDI even in brownfield airport projects with a view to aid modernisation of the existing airports and establish a high standard and help ease the pressure on the existing airports.

To attract companies like Apple, it has now been decided to relax local sourcing norms up to three years and a relaxed sourcing regime for another five years for entities undertaking single brand retail trading of products having 'state-of-art' and 'cutting edge' technology.

It has also been decided to permit 100 per cent FDI under government approval route for trading, including through e-commerce, for food products manufactured or produced in India.

Foreign investment will also be allowed up to 100 per cent in select segments in the defence sector, against 49 per cent that the present FDI regime permits under automatic route.  FDI above 49 per cent is permitted through government approval on case to case basis, wherever it is likely to result in access to modern and 'state-of-art' technology in the country. In this regard, the following changes have inter-alia been brought in the FDI policy on this sector:

  • Foreign investment beyond 49 per cent has now been permitted through government approval route, in cases resulting in access to modern technology in the country or for other reasons to be recorded.  The condition of access to 'state-of-art' technology in the country has been done away with; and
  • FDI limit for defence sector has also been made applicable to manufacturing of small arms and ammunitions covered under Arms Act 1959.

FDI policy on broadcasting carriage services has also been amended. Accordingly, 100 per cent FDI through automatic route will be allowed in setting up of teleports (setting up of up-linking HUBs/teleports); direct to home (DTH); cable networks (multi system operators (MSOs) operating at national or state or district level and undertaking upgradation of networks towards digitalisation and addressability); mobile TV;  and headend-in-the sky broadcasting service(HITS).

For cable networks (other than MSOs not undertaking upgradation of networks towards digitalisation and addressability and local cable operators (LCOs)), infusion of fresh foreign investment, beyond 49 per cent in a company not seeking license/ permission from sectoral ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require FIPB approval.

The extant FDI policy on pharmaceutical sector provides for 100 per cent FDI under automatic route in greenfield pharma and FDI up to 100 per cent under government approval in brownfield pharma. It has now been decided to permit up to 74 per cent FDI under automatic route in brownfield pharmaceuticals and government approval route beyond 74 per cent will continue.

The extant policy permits 49 per cent FDI under government approval route in private security agencies. FDI up to 49 per cent is now permitted under automatic route in this sector and FDI beyond 49 per cent and up to 74 per cent would be permitted with government approval route.

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 licence / permission by the concerned ministry/regulator has already been granted.

As per FDI Policy 2016, FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture is allowed 100 per cent under automatic route under controlled conditions. It has been decided to do away with this requirement of 'controlled conditions' for FDI in these activities.

Accordingly, the government has decided to introduce a number of amendments in the FDI policy. Changes introduced in the policy include increase in sectoral caps, bringing more activities under automatic route and easing of conditionalities for foreign investment. These amendments seek to further simplify the regulations governing FDI in the country and make India an attractive destination for foreign investors.

Today's amendments to the FDI Policy are meant to liberalise and simplify the FDI policy so as to provide ease of doing business in the country leading to larger FDI inflows contributing to growth of investment, incomes and employment.

In the last two years, the government has brought major FDI policy reforms in a number of sectors, like defence, construction development, insurance, pension sector, broadcasting, tea, coffee, rubber, cardamom, oil palm and olive tree plantations,  single brand retail trading, manufacturing, limited liability partnerships, civil aviation, credit information companies, satellites – establishment /operation and asset reconstruction companies.

The measures undertaken by the government have resulted in increased FDI inflows of $55.46 billion in financial year 2015-16, as against $36.04 billion during the financial year 2013-14. This is the highest ever FDI inflow for a particular financial year. The government, however, feels that a far more liberalised FDI regime has the potential to attract far more foreign investment (See: India received $55 bn FDI in last two years: Swaraj).

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