Major Changes In FDI Policy, Defence Sector Opens Up - Here’s What You Need To Know

The measures announced today have wide ranging implications in important sectors of the economy.

Here is a look at the same-

Defence

Under the extant FDI policy, upto 49 percent equity participation in Indian defence companies are allowed through the automatic route. Anything above that would be allowed by the government only if it feels we would get ‘state of the art technology’.

Today, the government decided to do away with the ‘state of the technology’ requirement and has made upto 100 percent FDI in defence possible through the government approval route. We will now see greater integration of Indian defence manufacturing facilities to the global supply chain.

Pharmaceuticals

The existing policy allows 100 percent FDI in greenfield (entirely new) pharma facilities and upto 100 percent FDI in brownfield (old) pharma.

The new policy would now allow upto 74 percent FDI in brownfield pharma under the automatic route but the government approval route will remain for FDI in brownfield pharma above 74 percent.

Although it is perplexing as to why the government did not liberalise the FDI regime for the pharma sector completely given that it is not a sensitive sector like defence, we should applaud the government for moving at least one step ahead.

Civil Aviation Sector

Under the existing policy, 100 percent FDI is allowed in the automatic route for greenfield airports and 74 percent in brownfield airports with FDI being allowed beyond that in brownfield airports with government approval.

The new policy will allow 100 percent FDI under the automatic route in brownfield airports too. In addition to liberalising the FDI regime for airports, 100 percent FDI is now allowed in commercial airlines with government approval needed for investment above 49 percent. NRIs will be allowed to invest in airlines upto 100 percent in the automatic route.

It will be interesting to see the impact this move will have on the ownership pattern of Jet Airways and GoAir. Now that Tony Fernandes of Air Asia has got Overseas Citizen of India status, we need to wait and see whether the 100 percent FDI under automatic rule will apply to his business.

The new policy on FDI will most probably help regional connectivity more than the Regional Connectivity Scheme in the National Civil Aviation Policy

Single Brand Retail Trading

Over the past few months, there has been considerable fuss over the Commerce Ministry’s support for relaxation of local sourcing norms in Single Brand Retail for products having ‘state of the art’ and ‘cutting edge technology’ so as to allow brands like Apple to set shop in India.

Under the new policy announced today, local sourcing norms will be relaxed for all brands for the first three years. The norms will be relaxed for five years for brands with ‘state of the art’ and ‘cutting edge technology’.

Questions remain as to how should brands be classified as having ‘state of the art’ and ‘cutting edge technology’ . The ambiguous nature of this classification has the potential to deter significant investment in single brand retail. On a happy note, Apple might set shop due to today’s policy changes

Other areas

Other than this, 100 percent FDI will now be allowed under the automatic route for DTH, Cable Networks, Mobile TV and Cable Networks.

100 percent FDI under the automatic route will also be allowed in Animal Husbandry,Pisciculture, Aquaculture and Apiculture without the rider of ‘under controlled conditions. 100 percent FDI will now be allowed with government approval in trading (including via e-commerce) of food products produced in India.