Indian Government announces easing of foreign direct investment rules

Posted: 27/07/2016

The Indian Department of Industrial Policy & Promotion (DIPP) has announced sweeping changes to its foreign direct investment policy with the release of Press Note 5 (2016 series). The new measures bring further liberalisation in nine key sectors, including allowing 100% FDI in defence, civil aviation and food processing. The  need for prior Government approval for up to 74% FDI brownfield investment in pharmaceutical companies has also been removed.

The major changes to the FDI policy are summarised below:

Single brand retail trading

100% FDI in ‘single brand’ retail trading is permitted (up to 49% FDI is allowed under the automatic route with Government approval needed beyond that). Where FDI exceeds 51%, there is a local sourcing requirement for 30% of the value of goods purchased, preferably from MSMEs, village and cottage industries, artisans and craftsmen. Under the new announcement, entities undertaking single-brand retail trading involving ‘cutting edge and state-of the-art technology’ can be exempted from the local sourcing requirement for three years, with an option to extend this by another five years.

The Government has already permitted a single brand retail trading entity operating through a bricks and mortar store to undertake retail trading through e-commerce.

Defence

Full foreign ownership of arms-making projects will now be allowed but this will be subject to Government approval. In the defence sector, the Government has permitted foreign investment beyond 49% under the Government approval route.

100% FDI had already been allowed in cases where ‘state-of-the-art technology’ was brought into the country. However, the Government has now removed this condition and will consider cases which bring ‘modern technology’ into India.

100% FDI in defence will provide a boost to the sector as a whole, creating a win-win situation for India. Not only will it give access to cutting edge technologies but it will also enhance overall investment in research and development for solutions catering specifically for the country’s security needs. 

Civil aviation

The Government has raised the FDI limit in scheduled commercial airlines to 100% from 49%. Foreign airlines, however, are barred from holding equity stakes in Indian carriers above 49%. As per the present FDI policy, foreign investment of up to 49% is allowed under the automatic route in scheduled air transport service/domestic scheduled passenger airlines and regional air transport services. It has now been decided to raise this limit to 100%, with FDI of up to 49% permitted under the automatic route and FDI beyond 49% allowed with Government approval.

The Government has also agreed to 100% FDI in airports under the automatic route for greenfield and brownfield projects.

Pharmaceuticals

The Government has relaxed its rules to allow 100% FDI in existing pharma companies or brownfield units provided any FDI beyond 74% is subject to Government approval. For all greenfield projects, 100% FDI is allowed under the automatic route. Until now, foreign pharma companies needed approval from the Government to buy into an Indian entity which is a time-consuming process. However, foreign pharma companies or financial investors wishing to invest or acquire Indian pharma companies can now do so by buying an equity stake of up to 74% without any prior clearance.

Private security agencies

The Government has permitted FDI of 49% in private security agencies under the automatic route and investment of up to 74% will be allowed with prior Government approval. Indian private security agencies are governed by the Private Security Agencies Act and an amendment to the Act may be required to increase FDI from 49% to 74%.

Other decisions have included allowing 100% FDI in teleports, direct-to-home, cable networks and mobile TV under the automatic route. The Government has also removed ‘controlled conditions’ for FDI in animal husbandry, pisciculture, aquaculture and apiculture. At present, 100% FDI in these activities is allowed under the automatic route under controlled conditions.

These are the second set of reforms to be introduced since the  radical changes announced in November 2015 to promote the Make in India agenda of the Government and are expected to provide a major uplift to employment and job creation in India. Investment in most sectors is now permitted under the automatic approval route, with just a few exceptions.

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