Government enables FDI support for self-reliance

By Neha Sinha and Radhika Malpani, L&L Partners
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In May 2020, the prime minister inaugurated Atmanirbhar Bharat or self-reliant India programme (ANB), and announced various economic packages to boost the economy. The main aim of ANB is to make India a global hub for manufacturing. To achieve self-reliance, India is looking at foreign investors to pump in much-needed capital. Although the foreign direct investment (FDI) policy has been significantly liberalised in the past decade, the government has introduced many changes after the inauguration of ANB.

One sector in which the prime minister emphasised the need for self-reliance is defence manufacturing. Besides implementing policy reforms, such as a new defence acquisition procedure, and an embargo on the import of certain defence equipment, the government in September 2020 took the bold step of relaxing the FDI limit in defence manufacturing.

Neha-Sinha-s
Neha Sinha
Partner
L&L Partners

The FDI limit for defence manufacturing has been raised from 49% to 74% under the automatic route, and up to 100% under the approval route where it is likely to result in access to modern technology. The requirement to obtain a government approval for fresh foreign investment up to the permitted automatic route level, in a company not seeking an industrial licence, resulting in a change in the ownership or the transfer of a stake to a new foreign investor has been removed. Fresh investment up to 49% requires only a declaration to be submitted to the Ministry of Defence within 30 days of capital infusion, but any investment exceeding 49% subject to the stated conditions will require government approval. These new rules also provide all foreign investments in the defence sector to be subject to scrutiny on the grounds of national security. This condition has raised concerns as investors consider it makes investment norms more restrictive than before. However, the government expects these FDI policy reforms to attract significant investment in defence manufacturing.

Radhika-Malpani-s
Radhika Malpani
Associate
L&L Partners

Another ANB area in which the government seeks foreign investment is the disinvestment of public sector enterprises (PSE). In February 2021, the finance minister announced a policy of strategic disinvestment of PSEs. The government set a target of INR175 trillion (USD2.3 trillion) in 2020-21 from disinvestment of over 20 PSEs including Bharat Petroleum Corporation Limited (BPCL), Air India, IDBI Bank and Bharat Earth Movers Limited. To encourage foreign investors to bid for the disinvestment portfolio and to realise optimal returns, the government has relaxed the FDI rules for the petroleum and natural gas, aviation and insurance sectors. The prime example is the relaxation of FDI in petroleum refining by PSEs, to allow up to 100% FDI under the automatic route where in-principle approval for strategic disinvestment of a PSE has been granted by the government, up from 49%. The government is keen to offload its entire stake of 52.98% in BPCL, triggering the open offer requirement. The old cap of 49% would have made it difficult for foreign investors to effectively participate in the process. Another example is the Life Insurance Corporation of India, where media reports suggest the government will probably amend the FDI policy to allow up to 20% foreign investment, post-IPO.

The government has identified several pharmaceutical companies, including HLL Lifecare Ltd, Bengal Chemicals and Pharmaceuticals Ltd, Hindustan Antibiotics Ltd and Indian Medicines Pharmaceuticals Corporation Ltd for disinvestment. Existing policy allows for FDI under the automatic route for investments up to 74% and under the approval route for investments up to 100%, in brownfield pharma. The government could consider the same relaxation as for petroleum refining, and permit FDI up to 100% in brownfield pharma PSEs under disinvestment. Such relaxations should encourage participation by foreign investors.

The economy is undergoing a significant transformation and the government has set ambitious targets for GDP growth while taking into account social and development needs. ANB is an integral part of the growth of the nation this decade. The government knows that its plans need considerable foreign investment and has been rightly proactive in removing obstacles and encouraging capital inflow. With these initiatives, the economy should maintain its momentum and enable the country to be truly self-reliant.

Neha Sinha is a partner and Radhika Malpani is an associate at L&L Partners

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