Multi-brand retailers like Walmart and Carrefour will be able to invest up to 49 per cent in Indian operations under the foreign portfolio investment route as per a clarification on the composite cap on FDI issued by the department of industrial policy and Promotion.
The DIPP clarification, issued a fortnight after the cabinet approved a composite-cap policy for foreign investment, which tries to bring all foreign investors under one classification, could be an major about-turn by the BJP-led government, which has so far opposed to foreign investments in multi-brand retail.
Moreover, such investment is allowed through the automatic route subject to the sectoral cap and up to a maximum of 49 per cent.
''This means that foreign investors in multi-brand retail can bring in investments in the form of FPI up to 49 per cent without government approval,'' a DIPP official clarified.
Even so, the government has categorically informed the European Union (EU) that it will not allow European multi-brand retail firms to set up shop here, even as both sides decided to resume negotiations towards concluding the long-pending Bilateral Trade and Investment Agreement (BTIA) negotiations that started in 2007.
The note issued by the DIPP on the composite cap on FDI does not specifically state the foreign investment limit for multi-brand retail as well.
Foreign portfolio investment includes foreign institutional investments (FII), sub-accounts and qualified foreign investments (QFIs).
However, foreign retailers will not be able to have direct management control of an Indian venture. FPI does not provide investors with the option of management participation.
The DIPP also clarifies that brownfield pharma projects will be allowed foreign investments through FPIs up to 49 per cent through the automatic route.
Foreign investments in brownfield projects have so far been allowed only through the government approval route.
The only exceptions to the composite cap rule are the defence and banking sectors.
In the defence sector, portfolio investments by FPIs / FIIs / NRIs / QFIs and investments by foreign venture capital investors (FVCIs) together cannot exceed 24 per cent of the total equity of the investee/joint venture company, while the FDI cap is at 49 per cent, the note said.
In the private banking sector, where the sectoral cap is 74 per cent, FII / FPI / QFI investment limits will continue to be within 49 per cent of the total paid-up capital of the company.
The government had so far been holding off from allowing foreign investments in the multi-brand retail sector despite an FDI policy that allows up to 51-per cent foreign investment in the sector under the approval route.
But, now, with the latest changes to the FDI policy, foreign investors will not have to approach the government at all to enter the multi-brand retail sector as long as they bring in their investments through the foreign portfolio investment route.
Since the policy continues to allow foreign direct investment up to 51 per cent through the automatic route, the government could change the composite cap as well.