India: Liberalization Of Foreign Direct Investment Limits In 12 Sectors

Foreign Direct Investment (FDI) in India is subject to certain Rules and Regulations and is subject to predefined limits ('Limits') in various sectors which range from 20% to 100%. There are also some sectors in which FDI is prohibited. The FDI Limits are reviewed by the Government from time to time and as and when the need is felt and FDI is allowed in new sectors where the limits of investment in the existing sectors are modified accordingly. In order to revise the FDI Limits to attract more foreign investment in India, the Union Government constituted a committee named, Arvind Mayaram Committee headed by the Economic Affairs Secretary. On Tuesday, 16th July, 2013, the Government approved the recommendations given by the Arvind Mayaram Committee to increase FDI limits in 12 sectors out of the proposed 20 sectors, including crucial ones such as defense and telecom.

Some of the important changes made in the Existing FDI Limits are provided below:

  •  FDI Limit in Telecom Sector is increased from 74 per cent to 100 percent, out of which up to 49 per cent will be allowed under automatic route and the remaining through Foreign Investment Promotion Board (FIPB) approval. A similar dispensation would be allowed for asset reconstruction companies and tea plantations.
  •  FDI in 4 sectors i.e. gas refineries, commodity exchanges, power trading and stock exchanges have been allowed via the automatic route. In case of PSU oil refineries, commodity exchanges, power exchanges, stock exchanges and clearing corporations, FDI will be allowed up to 49 per cent under automatic route as against current routing of the investment through FIPB.
  •  FDI in single brand retail is to be allowed up to 49 percent under the automatic route and beyond that shall be through FIPB.
  •  In credit information firms, 74 per cent FDI under automatic route will be allowed.
  •  In respect of courier services, FDI of up to 100 per cent will be allowed under automatic route. Earlier, similar amount of investment was allowed through FIPB route.
  •  FDI cap in defense sector remained unchanged at 26%, however higher limits of foreign investment in state-of-the-art manufacturing would be considered by the Cabinet Committee on Security (CCS). Technically, the decision leaves it open for CCS to even allow 100% foreign investment in what the defence ministry will define as "state-of-the-art" segments with safeguards built in to ensure that the technology and equipment are not shared with other countries.
  •  In the contentious insurance sector, it was decided to raise the sectoral FDI cap from 26 per cent to 49 per cent under automatic route under which companies investing do not require prior government approval. A Bill to raise FDI cap in this sector is pending in the Rajya Sabha.

Some of the sectors in which FDI limits were expected to be increased but did not were, civil aviation, airport, media, multi-brand retail and brownfield (existing firms) pharmaceuticals.

Tabular representations of the key changes proposed under the FDI Limits are as follows :

Sector/Activity Before the proposal After the proposal
% of FDI /Equity Entry Route % of FDI / Equity Entry Route
Defense Sector 26% Government Route No Change Higher limits of foreign investment in "stateof-the-art" manufacturing would be considered by the CCS
Insurance Sector 26% Automatic Route 49% Automatic Route
Telecom Services 74% Automatic up to 49% Government route beyond 49% and up to 74% 100% Automatic up to 49% Government route beyond 49% and up to 100%
Tea Plantation 100% Government Route 100% Automatic up to 49% Government route beyond 49% and up to 100%
Asset Reconstruction Company 74% of paid-up capital of ARC (FDI+FII) Government Route 100% Automatic up to 49% Government route beyond 49% and up to 100%
Petroleum & Natural Gas 49% Government Route 49% Automatic Route
Commodity Exchanges 49% (FDI & FII) + [Investment by Registered FII under Portfolio Investment Scheme (PIS) will be limited to 23% and Investment under FDI Scheme limited to 26% ] Government Route (For FDI) 49% Automatic Route
Power Exchanges 49% (FDI &FII) FDI limit of 26 per cent and an FII limit of 23 per cent of the paidup capital Government Route (For FDI) 49% Automatic Route
Stock Exchanges/ ClearingCorporations 49% (FDI &FII) FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital Government Route(For FDI) 49% Automatic Route
Credit Information Companies 49% (FDI & FII) Government Route 74% Automatic Route
Courier Services 100% Government Route 100% Automatic Route
Single Brand product retail trading 100% Government Route 100% Automatic up to 49% Government route beyond 49% and up to 100%

Conclusion

In order to liberalize Foreign Investment in India and to attract more number of foreign Investors the Government attempts to maintain a practice to continuously review the Foreign Investment policy. The acceptance of the recommendations to increase the Foreign Investment Limits in the respective sectors will not only attract Foreign Investment in India but will also provide growth opportunities to Indian Companies who can collaborate with Foreign Companies to start business in various new sectors. The withdrawal of requirement of Government Approval for Investment in different sectors will also act as an incentive to initiate various business prospects and will expedite the launch of new projects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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