FDI policy mentions start-ups for 1st time; AI may remain in domestic hands

Start-ups can issue convertible notes to persons residing outside India under certain conditions

The consolidated foreign direct investment (FDI) policy, released by the government on Monday, has mentioned start-ups for the first time.

It also said the rule allowing foreign airlines to own up to 49 per cent in Indian carriers did not apply to Air India.

Effective immediately, the updated version of the policy lists all changes in rules regarding FDI since the last policy was released in June 2016.

Start-ups can issue equity, equity linked instruments and debt instruments to foreign venture capital investors in accordance with FEMA rules. They can also issue convertible notes to persons residing outside India under certain conditions. The policy states convertible notes to non-resident investors will have to be issued with government approval in sectors where it is required for foreign investment.

Convertible notes establish that a company has received money as debt to be repaid at the discretion of the holder or to be converted into shares.

The government is planning to soon bring in further amendments to FDI norms. These include allowing FDI in multi-brand retailing beyond only food items as well as pushing up caps for foreign investment in the print media.

An official said consultations among  the finance ministry, the department of industrial policy and promotion, and various line ministries had been completed. A Cabinet note in this regard might be taken up this week, another official said.

No change in FDI norms for aviation means bidders for Air India can only be domestic airlines. “The policy mentioned at para for above (foreign carriers allowed to own 49 per cent in Indian carriers) is not applicable to M/s Air India Limited,” the government clarified in the FDI policy released on Monday. 

Experts said foreign carriers should be allowed to bid for Air India. “Foreign airlines’ equity participation up to 49 per cent in Air India’s divestment will be critical,” said Kapil Kaul, CEO, South Asia, CAPA, an aviation consultancy firm. “Restricting foreign airlines will send a wrong signal and constrain the number of interested bidders,” he added.  

IndiGo has shown interest in bidding for Air India’s international operations.

“We will wait to see how the government undertakes this divestment,” said IndiGo President Aditya Ghosh. 

An official said the group of ministers that will decide on Air India’s potential bidders can overrule the DIPP decision. “The group has the power to allow foreign players to bid for Air India,” a civil aviation ministry official said. The ministerial group headed by Finance Minister Arun Jaitley will decide on Air India’s disinvestment.

Over the past year, the government has liberalised FDI rules in over a dozen sectors, including defence, aviation, construction, private security agencies and news broadcasting.