Volume 4, Issue 7

17th September, 2012

Business Alert
Changes in FDI Policy finally
Multi-brand Retail, Domestic Aviation, Broadcasting & Power Sectors get the much awaited go ahead

After a long spell of inaction on the industry specific policy front, last week saw a flurry of activity by the Union Government. While the increase in the prices of diesel and LPG was an effort to rein in the burgeoning fuel subsidy burden, Friday was the day which many in the industry were waiting for a long time. The Cabinet and the CCEA announced a series of measures to ease foreign investment into India by proposing significant changes in the FDI regime across multiple sectors. The key highlights of Friday’s cabinet decision were to allow FDI in multi-brand retail and to allow foreign airlines to invest up to 49% in domestic carriers. While a detailed analysis will be shared by us soon, following is a brief round-up of the proposed changes.

It was a red letter day for the retail industry with the Government allowing foreign investment in Multi-brand Product Retailing. The Union Government allowed foreign companies to invest up to 51% in multi-brand product retail format. However, the various states were left free to decide if they will allow FDI in multi-brand format. Further, it also eased the norms regarding brand ownership and 30% local sourcing from MSME sector for companies seeking FDI in single brand product retailing. The Government had earlier tried to usher in FDI in multi-brand retail but had faced stiff resistance by opposition parties as well as its allies. The recent news has been hailed by Indian and foreign companies like Bharti Enterprises, Future Group, Carrefour, Tesco and Walmart that were hoping that the Government eases the existing norms. Friday’s decision will also be welcomed by firms like IKEA, which wanted the Government to ease the sourcing related norms.

The Indian airline industry also saw a lot of happy faces, with the Government allowing up to 49% FDI in existing carriers by foreign airline companies. A high tax structure on ATF prevalent and steep rise in airport charges have left most of the industry players bleeding red. With a cumulative loss of approx. USD 2.4 bn last year, the industry clearly needed a strong dose on the policy front. The announcement will be a morale booster for Kingfisher airlines, which alone saw losses in excess of USD 460 mn last financial year and is in dire need for capital. On the other side are companies like British Airways, Gulf Air and Middle Eastern Airlines that have been waiting on the fence for the Government to allow them in the Indian airline story. The investment will have to be via the Government approval route with foreign companies having to get a clearance from the FIPB and Home Ministry. There are other conditions regarding constitution of the Board and ownership/control structure.

The Cabinet also approved the decision to increase the FDI limit in the DTH segment to 74% from the earlier 49%. The same is with the rider that any investment beyond 49% will be through the Government approval route. The Industry has welcomed the move saying that the increased investment limit will go a long way in achieving the Government’s target of 100% digitization by 2014.

The final major decision was with respect to allowing 49% FDI in power trading companies. This again is a welcome step that will allow the power trading markets to become mature by allowing foreign companies to bring in capital as well as know-how and technology.

With the official circular on the proposed changes expected in the next few days, watch out for our detailed analysis of the latest round of FDI changes and its repercussions on the Indian Economic outlook.