New FDI rules unlikely to rush fund inflows
Coming soon after the Bharatiya Janata Party's debacle in recent Bihar elections, and just before Prime Minister Narendra Modi's visit to Britain, it was only natural that the latest review of India's foreign direct investment (FDI) policy should be tagged to either or both of these developments.
While these could have influenced the timing of the decisions, the changes - increase in FDI caps in a few areas, bringing of more sectors under the automatic approval route, opening up of new areas and easier rules in some - have been long in the making and will definitely boost investor sentiment. It is, though, doubtful whether the changes, which impact 15 sectors and cover 32 points or areas related to foreign investments, will result in opening the "flood gates" of fund inflows into India.
Take the case of the defence sector, where the government has allowed up to 49 per cent FDI under the automatic route. It has also increased the limit for portfolio and foreign venture capital investment in defence manufacturing from 24 per cent to 49 per cent. Clearly, the move has made it easy for foreign defence companies to do business in India. But has it created an attractive business proposition? Experts say unlikely. The biggest hurdle to the entry of private companies in the defence sector, they say, continues to be the country's Defence Procurement Policy. Unless that becomes conducive enough, global defence players may not commit big-ticket investments in the country.
THE NEW REGIME
REAL ESTATE
Restrictions of minimum 20,000 square metres floor area, capitalisation of $5 million removed
DEFENCE
No government approval required for foreign investment up to 49 per cent
BROADCASTING
FM radio operators, news channels can get 49 per cent FDI, after government approval
PLANTATION
100 per cent FDI allowed in coffee, rubber, cardamom, palm oil and olive oil plantations
BANKING
Full fungibility of investment in private banks. FIIs, FPIs, QFIs can invest up to 74 per cent
SINGLE BRAND RETAIL
30 per cent local sourcing requirement to kick off from opening of first shop, not the date of investment
CIVIL AVIATION
Along with scheduled air transport service/domestic scheduled passenger airline, regional air transport service will also be eligible for foreign investment up to 49 per cent under the automatic route
RAISING THRESHOLD FOR FOREIGN INVESTMENT PROMOTION BOARD APPROVAL
Limit increased from Rs 3,000 crore to Rs 5,000 crore
LIMITED LIABILITY PARTNERSHIPS (LLPs)
No government approval needed for 100 per cent FDI in LLP firms
ESTABLISHMENT AND TRANSFER OF OWNERSHIP AND CONTROL OF INDIAN COMPANIES
No government approval needed for investment in automatic route sectors by way of share swap
However, the reforms in the real estate sector seem to have a better chance of succeeding. The relaxation in thresholds related to floor area and capital investment could attract funds into smaller projects. Easier norms for exit and repatriation of investment before completion of the project should also make foreign investors happy. Removal of the lock-in period for investments in hotels & resorts, hospitals, special economic zones, educational institutions, etc, could also attract foreign funds into these segments. So, the norms will certainly help the cash-strapped real estate players, though it is too early to suggest that they will lead to a revival of the sector, which is troubled by land acquisition rules and sluggish demand.
The third important sector that has seen a series of amendments is broadcast. News broadcast companies can now have up to 49 per cent foreign ownership, but after government approval. Non-news TV channels can get up to 100 per cent FDI through the automatic route. The changes can trigger consolidation in the industry but will not be enough for any fresh investments, at least for now, say experts.
Similarly, the decision to allow 100 per cent FDI in the plantation sector, particularly coffee, rubber, cardamom, palm oil and olive oil, may also get a lukewarm response unless it is followed by politically-sensitive decisions such as reforms of land use and labour laws. It is precisely for these reasons that the tea plantation sector, where 100 per cent FDI is allowed since 2002, has not seen any major foreign investment.
The decision to introduce full fungibility of foreign investment in the private banking sector is also being seen as an attempt to ease the norms for doing business in the country. It is not expected to have a major impact on investment inflows.
While none of these reforms is expected to result in a rush of new investments, easing of conditions in general, such as 100 per cent FDI in limited liability partnerships, and raising of the threshold of investments cleared by the Foreign Investment Promotion Board from Rs 3,000 crore to Rs 5,000 crore, have been widely welcomed.
By creating more space for FDI, the government is preparing itself to face the possible exodus of hot money from the country if the US Federal Reserve increases interest rates in December. Though India is not in a position to stop such outflows, it can definitely try and create more investment avenues for foreign money and hope for the best.
To that extent, the latest revision in FDI norms will definitely help.
