Changes in FDI Regulation in 2015

An overview of the significant changes in FDI regulations in 2015. 

2016 saw the highest FDI inflows into India. Amount in USD million. Data source: RBI, chart by author

2015 saw the highest FDI inflows into India. Amount in USD million. Data source: RBI, chart by author

The financial year 2015 has been an exemplary one for foreign investments. Both FDI and FII have peaked in 2015. Net FDI inflows into India were a staggering $35billion, a 62 per cent jump from the previous fiscal year, which saw $21.6 billion. A report by the Japanese brokerage firm Nomura calculated that FDI forms 1.7 per cent of GDP, up from 1.1 per cent in the previous year.

  • The report attributes the higher net FDI to two factors: growing investor confidence in the country and lower outbound FDI following weak balance-sheet of domestic companies coupled with a weak global growth outlook. “We expect FDI inflows to pick up further in FY 2016, driven by an improving domestic growth outlook, recent liberalisation of FDI limits and government efforts to improve the ease of doing business,” the report says.
  • A sector wise breakup of the FDI inflows reveals interesting information. FDI into manufacturing, which the government has been trying to promote, has been modest. The auto industry has been an exception. Telecom, pharma and financial and business services were the largest recipients over the first three months of this fiscal year. The report speculated that some of the inflow was due to fund-raising in the e-commerce sector.
  • The government’s ‘Make in India’ campaign and higher FDI in the defence, insurance and other sectors are likely to see a further fillip in the net inflows.
  • The government’s move to put most of the sectors onto the automatic route and out of the RBI purview, as part of the grander plan for FDI liberalisation, has helped immensely. Further, increased caps on many sectors such as defence and insurance have helped.
  • FDI limits have been hiked in teleports (uplinking hubs), DTH (direct-to-home) and cable networks to 100 per cent with government approval required beyond 49 per cent. Further, news and current affairs TV channels and FM radio companies can now bring in up to 49 per cent FDI under the government route compared with 26 per cent earlier. For non-news and down-linking of TV channels, 100 per cent FDI has been permitted under the automatic route.

Apart from increasing the ceiling, the government has undertaken other steps towards FDI liberalisation. Some of them are:

  • Companies need not approach the Foreign Investment Promotion Board (FIPB), which is the nodal agency for attracting foreign investment, for M&As in sectors where FDI is allowed under the automatic route.
  • The circular also said the government permission will not be required for issuing ESOPS (employees’ stock option scheme) in sectors under the automatic route.
  • Allowed the Foreign Investment Promotion Board (FIPB) to clear proposals up to Rs 5,000 crore from Rs 3,000 crore earlier.
  • In construction industry, where India has traditionally fared poorly, area restriction (20,000 sq m) and minimum capitalisation requirement of $5 million to be brought in within six months of commencement of business have been removed. Further, foreign investors can exit and repatriate investments before a project is completed, but with a lock-in of three years.
  • In banking, the government has introduced full fungibility, meaning FIIs/ FPIs/ QFIs can now invest up to the sectoral limit of 74 per cent subject to the condition that there is no change in control and management of the private bank.
  • Manufacturers have been allowed to sell their products through e-commerce without government approval.
  • Another major booster for companies such as IKEA, a single-brand retail company with 100 per cent FDI, has come in the form of dilution in sourcing norms. Earlier, such companies had to ensure sourcing to the extent of 30 per cent of the value of goods from the date of FDI receipt. Now, it has been changed to opening of the first store.
  • In case of “state-of-the-art” and “cutting-edge technology” ventures under the single-brand route, sourcing norms have been relaxed. Further, single-brand retail companies can also undertake e-commerce business, not allowed at present.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

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