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FDI policy liberalised; foreign airlines allowed 49% stake in debt-ridden Air India

It permitted foreign airlines to invest up to 49 per cent under the approval route in the debt-ridden, loss making national carrier, said an official statement issued after the Cabinet meeting chaired by Prime Minister Narendra Modi.
Reported by: PTI New Delhi January 10, 2018 23:36 IST

In big bang reforms ahead of BJP government's last full Budget, the Centre on Wednesday allowed foreign airlines to buy up to 49 per cent stake in Air India and eased FDI rules for several sectors including single brand retail and construction.

In a bid to boost growth and improve ease of doing business, the Union Cabinet allowed 100 per cent Foreign Direct Investment (FDI) in single brand retail and construction development under the automatic route.

It permitted foreign airlines to invest up to 49 per cent under the approval route in the debt-ridden, loss making national carrier, said an official statement issued after the Cabinet meeting chaired by Prime Minister Narendra Modi.

The Cabinet also allowed foreign institutional and portfolio investors to invest in power exchanges and relaxed FDI policy for medical devices and audit firms associated with companies receiving overseas funds.

Besides, the clarification that real estate broking service will not amount to real estate business has addressed the issue being faced by such firms. It is therefore, eligible for 100 per cent FDI under the automatic route.

The decisions came ahead of Modi's participation in World Economic Forum at Davos this month where he is likely to hard sell India as an attractive investment destination. They also came weeks before the BJP government presents its fifth and final full year budget on February 1 before general elections next year.

"By permitting FDI up to 100 per cent under automatic route in single brand retail trading, the government has eliminated the time lag for foreign investor to set up a single brand retail operations in India," said Dev Raj Singh, Executive Director, Tax & Economic Policy Group, EY India.

The changes will give a boost to FDI inflows, he added.

In a move that will give a boost to foreign retailers like Ikea, the government approved 100 per cent FDI under the automatic route for single brand retail trading. Earlier also 100 per cent FDI was allowed in the segment, but it required government approval.

The amendments are intended to liberalise and simplify the FDI policy so as to provide ease of doing business. 

"In turn, it will lead to larger FDI inflows contributing to growth of investment, income and employment," the government said in a statement.

The decision to allow foreign airlines to invest up to 49 per cent would pave away for global airlines to bid for government stake when it is put for sale.

"Foreign investment(s) in Air India including that of foreign airline(s) shall not exceed 49 per cent either directly or indirectly substantial ownership and effective control of Air India shall continue to be vested in Indian National," the statement said.

Air India had a total debt of about Rs 48,877 crore at the end of March 2017, of which about Rs 17,360 crore was aircraft loan, and Rs 31,517 crore for working capital. It is expected to report a net loss of Rs 3,579 crore for 2017-18.

Overseas investment policy has also been liberalised in case of power exchanges, an online platform where electricity is traded. Currently, the policy provides for 49 per cent FDI under automatic route in power exchanges. 

However, FII/FPI (foreign portfolio investors) purchases were restricted to secondary market only.

"It has now been decided to do away with this provision, thereby allowing FIIs (foreign institutional investors/FPIs to invest in power exchanges through primary market as well," the statement said.

‘Decisions to help remove roadblocks for receiving foreign investments’

Commerce and Industry Minister Suresh Prabhu said the decisions would help "remove roadblocks" for receiving foreign investments and expressed the hope that relaxation of norms would facilitate faster development of the economy.

"The move will not only attract additional foreign capital into the country, but will also provide an impetus to the retail industry growth, at a time when organised and retail is already seeing strong growth over the last 12 months," said Rajat Wahi, Partner, Deloitte India.

"Global brands across different categories, from apparel to electronics to accessories will be aided through this, providing further options to Indian consumers and improving India’s ranking in ease of doing business," he added.

This is the second major liberalisation in FDI policy by the NDA government in one go after major changes effected in June 2016.

Secretary in the Department of Industrial Policy and Promotion (DIPP) Ramesh Abhishek said the move would help further improve investment climate in India.

The government also said that issue of shares against non-cash considerations like pre-incorporation expenses and import of machinery will now be permitted under the automatic route in case sectors do not require government nod.

Relaxing a procedural requirement, the government said it has now been decided that for investments in automatic route sectors, requiring approval only on the matter of investment being from country of concern (that is Pakistan and Bangladesh), FDI applications would be processed by the DIPP for government nod.

Cases under the government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by concerned administrative department or ministry. Earlier the applications were processed by the Ministry of Home Affairs.