Indian prime minister Manmohan Singh has surprised and elated investors with a wave of reforms to liberalize various industries, opening the door to more foreign investment. The news broke just as India Business Law Journal was going to press.
Singh’s liberalization campaign paves the way for foreign forays in several lucrative sectors including retail, aviation, broadcasting and power trading exchanges. The opening of the multi-brand retail sector was perhaps the biggest shock following the government’s reluctance in December last year to proceed with the reforms amid dense political opposition.
Now, the Cabinet Committee on Economic Affairs (CCEA) has said it will allow foreign participation of up to 51% in multi-brand retail, providing investors fulfil the conditions stipulated. For example, investors will only be permitted to set up retail outlets in cities with a population of 1 million or more. Half of the total foreign direct investment (FDI) must be put towards back-end infrastructure – processing, manufacturing, distribution, packaging, storage, etc. – within three years of the initial investment. In addition, at least 30% of the value of the products sold must be sourced locally in India from small and medium-sized enterprises.
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Individual state governments have the power to reject FDI in multi-brand retail if they choose to do so. The governments of Maharashtra, Andhra Pradesh and Rajasthan are among those that have expressed their approval for such investment.
The CCEA has also given single-brand retail a boost, permitting not just brand owners, but also single non-resident entities to invest in the sector. There is no limit on FDI in single-brand retail and some investors may profit from eased rules on mandatory sourcing. Earlier, 30% of the value of products sold had to be sourced locally if FDI in single-brand retail was 51% or more. The CCEA has relaxed this condition, saying that mandatory sourcing is not required in sectors where domestic sourcing may not be feasible.
Prior to this month’s reforms, 49% FDI in civil aviation was permitted by foreign entities other than foreign airlines. Foreign airlines could only invest in non-passenger air transport services such as cargo airlines. The CCEA has retained the 49% cap, but has given foreign airlines the opportunity to invest in scheduled and non-scheduled air transport services.
Other changes include a rise in FDI limits in certain segments of the broadcasting sector from 49% to 74%. The CCEA has also given foreign institutional investors the green signal to invest up to 23% in power trading exchanges. FDI of up to 26% is permitted in this sector. A more detailed analysis of the reforms will be available in next month’s issue of India Business Law Journal.
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