FDI cap raised to 100% for Railways, 49% for defence projects

Currently, there is a ban on FDI in most railway projects, while defence FDI is capped at 26%

The Union Cabinet on Wednesday cleared the proposal to set the composite cap for foreign investment in the defence sector at 49 per cent, compared with the current 26 per cent foreign direct investment (FDI) ceiling. But the management control of companies receiving these investments must remain in the hands of Indians. Also, some railway operations and projects were allowed to receive up to 100 per cent FDI.

The decisions came barely two weeks after the Cabinet approved a similar proposal to set the composite foreign investment cap for private insurance firms at 49 per cent, provided ‘control’ remained with Indians.

According to officials in the know of the developments, all proposals for FDI in the defence sector, even those for less than 26 per cent, will require approval from the Foreign Investment Promotion Board (FIPB); these clearances will be given on a case-to-case basis. This is believed to have been done keeping in mind “national security concerns, as it (defence) is a highly sensitive sector”.

By comparison, the decision for the insurance industry was that FIPB’s clearance would be required in proposals for more than 26 per cent FDI. Also unlike the insurance decision, the approval for defence FDI is an executive decision and will not require Parliament’s clearance. The government has not been able to table the insurance amendment Bill in the Rajya Sabha due to persistent demand from Opposition parties that the legislation be referred to a select committee.

The government is believed to be optimistic that Wednesday’s decision will attract foreign companies interested in setting up manufacturing facilities here. But experts do not appear impressed.

Dev Raj Singh, executive director (tax & regulatory services), EY, says the decision will boost sentiment but might not lead to a big increase in investments. He argues defence FDI beyond 26 per cent was allowed earlier ass well, but it required the Cabinet Committee on Security’s clearance.

OPENING UP

Defence
Earlier position:

• Up to 26% FDI allowed through the Foreign Investment Promotion Board (FIPB) route
• Clearance from the Cabinet Committee on Security required for FDI beyond 26%; approval on a case-to-case basis

New position:

• Up to 49% FDI allowed after FIPB approval
• Control has to be with Indian companies

Railway projects

Earlier position:

• FDI prohibited

New position:

• Up to 100% FDI permitted in  in some operations like freight corridor, high-speed train, port and mining connectivity projects through different modes
• Up to 100% FDI allowed in most cases in rail projects like gauge conversion, construction of new lines, doubling of new lines and maintenance PPP projects

According to Vivek Vikram Singh, director, Grant Thornton India, the Cabinet’s move is not transformational enough to kickstart the creation of an independent local defence manufacturing ecosystem. “Sure, there will be a few joint venture formations where tenders are already in the pipeline, such as the MMRCA deal, the SAR (sea planes), etc. These will have a knock-on effect on medium-sized suppliers to these JVs, as well as players who benefit from the offset opportunity,” he says, but adds that these benefits would have accrued even if the FDI limit was 26 per cent, so little will change for the industry.

The Cabinet also permitted foreign investment in rail operations like dedicated freight lines, high-speed trains and mining & port connectivity, besides allowing FDI in some projects like construction of new lines, gauge conversion, doubling of lines and maintenance projects under the public-private partnership model. For joint venture in the area of projects, up to 74 per cent FDI will be allowed.

These FDI proposals will be allowed under the automatic route, so these will not require FIPB approval. This decision, too, is an executive one and need not go to Parliament.

The Railways Policy of 2012 had also allowed foreign players in rail projects, but this could not become a reality as the Industries Act, 1951, and the consolidated FDI policy of 2013 did not have enabling provisions. Wednesday’s decisions will remove this anomaly.

It is believed that companies will have to float special-purpose vehicles to bring in FDI in the areas of rail operations to provide last-mile connectivity to ports and mines. However, there is no clarity on this in the Cabinet decision.