Govt eases FDI rules, foreign airlines can buy 49 per cent AI stake

New Delhi: The Union Cabinet on Wednesday allowed foreign airlines to buy a stake of up to 49 per cent in troubled state-run carrier Air India and tweaked the foreign investment rules in single-brand retail, construction and power exchanges.

The move comes shortly before Prime Minister Narendra Modi attends the World Economic Forum’s annual meeting at Davos, Switzerland, later this month where 60 head of state or government and top global CEOs will be present. The liberalisation in FDI rules is expected to send a message to investors that India is still on the path of reforms despite growth falling to a four-year low in 2017-18 after moves like demonetisation. Mr Modi, who will the first Indian PM in over 20 years to attend the WEF event, will meet around 120 CEOs of top multinational corporations there.

The Union Cabinet on Wednesday decided to bring Air India at par with private airlines operating in the country by allowing foreign airlines to invest up to 49 per cent in the national carrier. However, substantial ownership and effective control of Air India will remain vested in Indian nationals. The move will allow foreign airlines to bid for a stake in Air India, which the government is planning to divest.

The Cabinet allowed 100 per cent foreign direct investment in single-brand retail through the automatic route and eased the 30 per cent local sourcing norms for five years, which should help companies like Apple to set shop in the country. Currently, while 100 per cent FDI was allowed in single-brand retail, foreign investment beyond 49 per cent needed government permission.

As per the relaxed sourcing norms, a foreign retailer will be able to get credit from incremental increase in sourcing for its global operations from India towards the 30 per cent mandatory local sourcing requirement.

After the completion of this five-year period, the retailer will be required to meet the 30 per cent sourcing norms directly towards its India’s operation. “What the government has said is that single-brand retailers, who are also sourcing from India for their global markets for the incremental increase in their global sourcing, will be given credit for five years,” said DIPP Secretary Ramesh Abhishek. The move is likely to help retailers by giving them adequate time to set up their supply chain for local souring in India, said Rajat Wahi, partner, Deloitte Touche Tohmatsu India.

As per the existing procedures, FDI proposals under the automatic route from countries of concern (Pakistan and Bangladesh) are processed by the Unionhome ministry. It has now been decided that such proposals would be processed by the department of industrial policy and promotion. However, cases under the government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by the concerned administrative department.

The Cabinet decided to clarify that real-estate broking service does not amount to real estate business, and is therefore, eligible for 100 per cent FDI under the automatic route.

Foreign investment rules have also been liberalised in case of power exchanges, an online platform where electricity is traded. Currently, the policy provides for 49 per cent FDI under the automatic route in power exchanges. However, FIIs’ purchases were restricted to the secondary market only. “It has now been decided to do away with this provision, thereby allowing FIIs/FPIs to invest in power exchanges through the primary market as well,” said an official statement. The Cabinet also relaxed the FDI policy for medical devices and audit firms associated with companies that get overseas funds.