India allows 49% foreign investment

Burnishing its reform credentials ahead of Prime Minister Narendra Modi’s hard-sell of the India growth story at the World Economic Forum (WEF) in Davos later this month, the cabinet on Wednesday unveiled measures to liberalize the foreign direct investment (FDI) regime in aviation, single-brand retail, power exchanges and real estate broking.

The government allowed foreign airlines to buy a stake of up to 49% in Air India with prior government approval ahead of the state-owned airline’s proposed privatization. Existing rules allow foreign airlines to own as much as 49% in private Indian airlines, but not in Air India.

After a cabinet meeting chaired by Prime Minister Modi, the government clarified that substantial ownership and effective control of Air India will remain with Indian nationals. “Foreign investments in Air India including that of foreign airlines shall not exceed 49% either directly or indirectly,” the government said in a statement.

Mint reported on Tuesday that the government will invite expressions of interest from those interested in buying Air India Ltd after the budget presentation on 1 February, citing aviation secretary Rajiv Nayan Choubey.

Air India had total debt of about Rs48,877 crore at the end of March 2017—Rs17,360 crore of aircraft loans and Rs31,517 crore of working capital loans.

The government has appointed EY to advise it on the privatization exercise, in which the invitation seeking expressions of interest from would-be bidders is the first step. Cyril Amarchand Mangaldas will be the legal adviser.

“It is a major reform and national economic policy decision—not just limited to aviation. It sends a very important signal to the global investors,” aviation consulting firm CAPA Centre for Aviation said in a note on Wednesday. “We expect a significant interest from foreign airlines though the offer and conditions attached will determine the level of participation in the bids. See 4-6 serious bids for AI subject to bid conditions.”

IndiGo, run by InterGlobe Aviation Ltd, and Tata Sons Ltd have shown interest in Air India’s operations. Turkey’s Celebi Aviation Holding, Bird Group, Menzies Aviation Plc. and Livewel Aviation Services Pvt. Ltd have shown interest in the national carrier’s subsidiaries.

The International Air Transport Association (IATA) said the government’s move was inclusive in that it allows FDI in the single airline not covered by the foreign investment policy. “At the same time, it is important that the government ensures that airlines in India have the most conducive operating and regulatory environment to compete effectively,” Albert Tjoeng, assistant director, corporate communications for the Asia Pacific at IATA, said in a statement.

The cabinet also approved 100% FDI in single-brand retail without the requirement of prior government approval. India allows 100% FDI in single-brand retail, but investment beyond 49% requires prior government approval.

The cabinet eased the local sourcing rule for foreign single-brand retailers; for five years, such entities are not required to meet the 30% target for local sourcing by their Indian units if they are already doing so for their global operations, it said. So far they have been required to source locally 30% of the value of goods purchased for their Indian business initially as an average of five years; later they were required to meet the requirement on a yearly basis.

Janne Einola, country manager at the India unit of Swedish fashion retailer H & M Hennes & Mauritz AB, said: “We are happy to hear about the India sourcing requirement being offset towards H&M’s global sourcing from India; while it is in the right direction, we look forward to the same relaxation for the period beyond the initial five years as well, which works towards ease of doing business in India.”

The government has allowed foreign portfolio investors to purchase stakes of up to 49% in power exchanges directly under the automatic routes. So far, such investors were restricted only to investments in the secondary market.

The government also clarified that real-estate broking services aren’t real estate business and are, therefore, eligible for 100% FDI under the automatic route.

For foreign investments from so-called countries of concern that currently include Pakistan and Bangladesh, FDI applications for sectors under the automatic route will now be vetted by the industry department rather than the home ministry.

The measures were announced ahead of Modi’s visit to Davos to attend the WEF, where he is expected to talk about India’s growth potential and court foreign investment.

Harveen Ahluwalia in New Delhi and Soumya Gupta in Mumbai contributed to this story.