Another Round of FDI Reforms

The Government seems to be facing a somewhat similar
situation that it faced way back in 1991 when it launched big bang reforms for liberalization
of the Indian economy. With slowing growth rates and a sliding Rupee, the
Government seems compelled to take immediate measures. One such set of measures
relates to reforms that help attract greater flow of foreign direct investment
(FDI) into the country.
Yesterday, the Cabinet approved relaxation of foreign
investment in various sectors. The gist of the reforms and the proposed
position regarding FDI are set out below:
– Petroleum and natural gas and
refining: up to 49% under the automatic route;
– Commodity exchanges: up to 49%
under the automatic route;
– Power exchanges: up to 49% under the
automatic route;
– Stock exchanges, depositories corporation:
up to 49% under the automatic route;
– Asset reconstruction companies:
up to 49% under the automatic route, and between 49% and 100% under the FIPB
– Credit information companies: up
to 74% under the automatic route;
– Single brand retailing: up to 49%
under the automatic route, and between 49% and 100% under the FIPB route;
– Basic and cellular services: up
to 49% under the automatic route, and between 49% and 100% under the FIPB route;
– Courier services: up to 100% under
the automatic route; and
– Defence production: CCS may
approve proposals on case to case basis beyond 26% which are likely to result
in access to modern and state of the art technology in the country.
These are only decisions of the Cabinet and will need to be
translated into Press Notes that become part of the FDI policy. It remains to
be seen whether additional conditions or qualifications may be included that
may affect the nature and extent of these policy changes.
Among the various sectors, the one that might see tremendous
activity in the near-to-medium term is the telecom sector where up to 100%
foreign investment has been allowed. Being a sensitive sector, hitherto only a
maximum of 74% was allowed that required foreign investors to have Indian
parties holding the balance 26%. Now, it is likely that there may be a spate of
M&As whereby the foreign partners may buy over the stake of the Indian
partners so as to make the Indian telecom entity a wholly owned subsidiary of
the foreign parent.
While there was a great amount of anticipation regarding
reforms relating to FDI in the defence sector, the changes have not been
overarching in nature. The discretion still remains with the Government to
decide whether to grant approvals that merit more than 26% foreign investment.

After some months and years of resistance to
wholesale reforms in the FDI policy, the Government has been compelled to act
given the current circumstances facing the Indian economy. This is expected to
substantially revive investment interest in the Indian markets and generate a
greater flow of foreign investment into the economy.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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