This content is from: Local Insights

Liberalisation of Indian foreign investment policy

On September 20 2012, the Government of India issued several press notes liberalising foreign direct investment norms in sectors such as aviation and multi-brand retail (MBR). The government thus allowed foreign investors to hold up to 51% of the share capital in Indian companies operating in the MBR sector, and allowed foreign airlines to hold 49% in companies operating scheduled and non-scheduled air transport services. Before this liberalisation, foreign direct investment was prohibited in MBR, and foreign airlines were prohibited from investing in air transport services (though foreign entities other than airlines could make investments in this sector).

MBR

Despite the reforms, companies such as Carrefour and Walmart will not be automatically eligible to invest in India. Such investments require prior approval from the Department of Industrial Policy and Promotion, in addition to approval from the Foreign Investment Promotion Board (FIPB). A minimum capitalisation of $100 million is required to be made and 50% of this amount is to be invested in back-end infrastructure such as processing, manufacturing and storage. Further, retail outlets can only be set up by Indian companies with foreign direct investment in cities with a population of more than one million and only in those states/union territories which have permitted MBR. As of October 1 2012, 10 state governments/union territories have confirmed that foreign investment in MBR is welcome.

Aviation

Two decades after Gulf Air was effectively asked to divest its stake in Jet Airways and the Singapore Airlines joint venture with TATA was denied takeoff clearance, the Indian skies have once again been opened to foreign airlines. Foreign airlines can now invest up to 49% in companies operating scheduled and non-scheduled air transport services with prior FIPB approval. Until now, participation of foreign airlines was restricted to companies operating cargo airlines, helicopter and sea plane services.

Further safeguards have been put in place. The chairman and two-thirds of the directors of foreign-invested companies are required to be Indian citizens, and substantial ownership and effective control must lie with Indians. Additional conditions have been imposed from the perspective of national security and all foreign nationals who are to be associated with the sector will need prior security clearance from the central government.

This reform overdrive has met with mixed sentiments; one needs to wait and watch.

Nitu Agarwal and Sumitava Basu

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