India Institutes More FDI Changes, Opening Most Sectors to Automatic Route

By Dezan Shira & Associates
Editor: Tracie Frost

The Indian Government announced further liberalization of the foreign direct investment (FDI) regime, hoping to increase employment. The changes are the second round of reforms after significant modifications to the regime in November 2015. 

The reforms make FDI in most sectors available under the automatic approval route and continue the path to fully opening all sectors to foreign direct investment. Since 2014, India has made FDI reforms in defense, construction, single brand retail, manufacturing, aviation, communications, select agricultural segments, and the financial sector. The new amendments in FDI policy include increases in sectoral caps, bringing more activities under the automatic approval route, and easing the conditions for foreign investment.

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Defense Sector

Foreign investment beyond 49 percent is permitted through the government approval route, and the condition of access to “state-of-the-art” technology has been done away with.  FDI limits for the defense sector now apply to manufacturing of small arms and ammunitions as well.

Broadcasting Carriage Services

Changes allow 100 percent FDI under the automatic route for teleports, direct-to-home, cable networks, mobile TV, and headend-in-the-sky broadcasting services. However, new foreign investment beyond 49 percent in a company not seeking license or permission from a sectoral ministry, which results in a change in the ownership or a transfer of a stake by existing investors to a new foreign investor, requires Foreign Investment Promotion Board (FIPB) approval.

Pharmaceuticals

The previous FDI policy on the pharmaceutical sector provided for 100 percent FDI under the automatic route in greenfield pharma and FDI up to 100 percent under the government approval route in brownfield pharma. The new rules permit up to 74 percent FDI under the automatic route in brownfield pharmaceuticals. FDI beyond 74 percent in brownfield pharma still requires government approval.

Civil Aviation Sector

Hoping to modernize existing airports, the government will permit 100 percent FDI under the automatic route in brownfield airport projects. Previously, FDI beyond 74 percent for brownfield projects was under the government approval route. 

Additionally, previous FDI policy allowed foreign investment up to 49 percent under the automatic route for air transport services. The government will raise this limit to 100 percent, with FDI up to 49 percent permitted under automatic route and FDI beyond 49 percent through government approval. For non-resident Indians, 100 percent FDI will continue to be allowed under the automatic route. However, foreign airlines will continue to be allowed to invest in capital of Indian companies operating air transport services up to the limit of 49 percent of their paid up capital and subject to the conditions in the existing policy.

Private Security Agencies

FDI up to 49 percent is now permitted under the automatic route in this sector, and FDI beyond 49 percent and up to 74 percent will be permitted with government approval.

Establishment of Branch Office, Liaison Office, or Project Office

For establishment of a branch office, liaison office, or project office in India, approval of the Reserve Bank of India or separate security clearance will not be required in cases where Foreign Investment Promotion Board approval or license/permission by the concerned ministry or regulator has already been granted. 

Animal Husbandry

The new rules do away with the previous requirement of “controlled conditions” for FDI in animal husbandry activities.

Single Brand Retail Trading

The new rules will relax local sourcing norms up to three years in general. For entities undertaking single brand retail trading of products having “state-of-art” and “cutting edge” technology, the sourcing regime will be relaxed for another five years.

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Observations

These changes aim to draw more foreign direct investment to India. In recent months, India has become the top FDI destination in terms of capital investment in green field projects. However, some analysts see the uptick in FDI as a result of the ongoing global slowdown (particularly in China), instead of as a result of India’s improved policies. India hopes to seize the opportunity at hand and, based on strong economic fundamentals and untapped labor potential, to use the influx of FDI funds to grow investment, incomes, and employment.

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