The Government of India has set an ambitious target of making India a $5 trillion economy by the year 2024-25. To achieve this, India’s GDP needs to grow at 8% annually over the next five years and, to that effect massive investment is required across industries, especially in the infrastructure sector. India doesn’t have the financial strength to fund this investment on its own. Large scale foreign investment in India is required to accomplish this task.
Though India managed to buck the global trend of negative FDI growth and recorded 6% growth, it was still far below the average growth of above 20% during the three years between 2014 and 2016. To kick start the economy few significant announcements were made in terms of FDI in India in this year’s budget.
Foreign Portfolio Investment
To attract FPIs, which had pulled out around INR45000 crores from the Indian markets in the last financial year, back to India, following announcements were made:
- FPI in a company to be increased from the current cap of 24% to the sectoral foreign limit with the option given to the concerned company to keep it to a lower level.
- FPI to be allowed to subscribe to listed debt instruments of real estate investment trusts and infrastructure investment trusts.
- Foreign investments made in debt instruments issued by infrastructure debt funds shall be allowed to be sold to domestic investors during the lock-in period.
- Strict KYC norms for foreign investors to be eased and rationalized and the entire KYC process to be streamlined without compromising on the ethics of cross border capital flows.
Merger of NRI investment Route with the FPI route
Until now, NRIs were allowed to invest in India through the portfolio investment schemes. These schemes, regulated by the RBI, allowed investment only up to 5% of the paid up share capital or 5% of the value of each series of warrants, debentures or preference shares. Additionally, the collective holdings of all NRIs are capped at 10% of the equity capital of a company. This 10% limit can, however, be increased up to 24% by special board resolution. This rule also extends to holdings in debentures, preference shares, and warrants.
To boost foreign investment in India, the RBI has now proposed to merge the existing NRI investment route with the FPI route. This proposal aims to not only provide a level playing ground for NRIs at par with the FPI, but also ease the reporting norms for foreign investments. The move is aimed at encouraging enhanced investments by NRIs and to allow them to trade their investments with foreign funds.
Single Brand Retail
At present 100% foreign direct investment in single brand retail under the automatic route is allowed in India, with the condition that 30% of the value of goods should be sourced locally. This restriction is strictly binding on the company that received FDI and did not encompass other group companies sourcing from India. These sourcing conditions were proving to be a major obstacle for foreign companies in setting up single brand retail outlet. A relaxation in the 30% sourcing norm to allow group companies to source from India will encourage foreign investors, who were till now hesitant because of lack of clarity, to set up shop in India. This move has the potential to open up the Indian market for automobile, electronics, and luxury brands, etc.
The FDI in the aviation sector is currently capped at 49%.Taking into account the challenges faced by the domestic aviation industry, as demonstrated by the failure of the Kingfisher Airlines earlier and Jet Airways recently, the government has proposed to increase the foreign investment limit to possibly 100%. Though no exact figure has been announced, this could be a significant move considering the grounding of the Jet Airways because of severe financial crunch and the proposed divestment in Air India.
Current FDI limit of 49% in insurance Sector is proposed to be increased to allow foreign partners to take up majority stake. When the limit was increased from 26% to 49%, it brought in significant operational efficiency. However the present 49% cap restricts foreign partners to introduce new products and best international practices into India. The Finance Minister has promised to consider the suggestion of various players to further open up the sector. Additionally, allowing 100% FDI in insurance intermediaries will improve the distribution and penetration of insurance products.
To conclude, easing of norms for foreign investment in India would certainly give fillip to foreign investment in Indian company and help India realize the targeted growth rate of 8% over the next five years.