In pursuance of the country’s liberalization policy, the GOI notified a hike in FDI in the telecom sector up to 74% from the earlier upper limit of 49%. A further decision to permit the transfer of shares in service companies from resident owners to foreign investors through the automatic route is another boon to foreign investors. The government has also permitted FDI in the equity capital of asset reconstruction companies (ARCs).

Features of the FDI hike in telecom

  • FDI allowed up to 74% subject to leasing and security requirements for Internet services, infrastructure providers and radio paging services.

  • FDI up to 100% is allowed subject to the condition that the company divests 26% of its equity within a period of five years, if these companies are listed in another part of the world.

  • FDI beyond 49% will be considered by the Foreign Investment Promotion Board (FIPB) on a case-to- case basis

  • FDI investment is permitted up to 49% in telecom-related investment companies.

  • FDI may be effected by FIIs, NRIs, FCCBs, ADRs, convertible preference shares and proportionate foreign investment

  • FDI may be made directly or indirectly through an operating company or a holding company

Korean and Japanese telecom giants are expected make entry into the Indian telecom scene. European and American telecom behemoths like Vodafone who insisted on major stakes to invest into India will find themselves comfortably placed.

Automatic route for transfer of shares

Shares can be transferred from resident owners to foreign investors through the automatic route. This applies to banking, insurance and non-banking finance companies (NBFCs)

Presently approval is required from FIPB for such a transfer. GOI’s decision on this matter is based on the fact that financial services are separately regulated and also since initial investment in these companies is allowed through the automatic route

Features of FDI in ARCs

Following the footsteps of Malaysia, China, Taiwan and Korea, GOI has permitted 49% FDI in the equity capital of ARCs, to help companies improve their financial health.

  • All investments need the approval of the FIPB

  • FIIs are not allowed to pick up stakes in ARCs

  • Sole foreign investors can invest only up to 10% within the 49% limit

  • FIIs can pick up only shares and debt papers

ING, Actis and Stanchart are some of the parties interested in acquiring stakes in ARCs. The decision of the government in this regard is a stepping stone towards the establishment of a junk bond market in India

Other FDI policies under consideration

As of now 100% FDI is allowed only in tea plantation, B2B e-commerce, actual trading and marketing of petroleum subject to 26% divestment in favour of Indian public within a period of five years.

GOI plans to rationalize existing FDI in seven sectors- (i) airports, (ii) mining coal and lignite, (iii) mining of diamonds and precious stones, (iv) petroleum, (v) trading, (vi) power-trading, (vii) coffee and rubber processing- by raising the FDI upper limit or simplifying procedures or both.

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