Indian Government Relaxes Foreign Investment Norms in Retail and Aviation Sectors

On September 14, 2012 the Government of India made significant announcements regarding its policy on foreign direct investments. The key changes relate to the opening up of the multi-brand retail sector to foreign investors and the air transport sector to foreign airlines.

Retail sector

While FDI in single-brand retail and back-end wholesale cash-and-carry trading was permitted, a foreign retailer could not, until now, undertake pure-play multi-brand retail trade in India. The announcement eases the way for foreign direct investments of up to 51 per cent in Indian multi-brand retail companies. This relaxation in the policy was first announced late last year but a political backlash forced the ruling coalition government to put the measure on hold.

In addition to the investment limit of 51 per cent, certain other conditions have been imposed whilst permitting such investments. These include a minimum investment of US$100 million, a requirement that 50 per cent of the total foreign investment be spent on back-end infrastructure within 3 years of the investment and a stipulation that the company procure at least 30 per cent of products from local small and medium industries. Further, a restriction has been imposed on the location of outlets, including a condition that FDI-infused multi-brand retail stores can be set up only in cities with a population of one million or more (with limited exceptions). Importantly, the policy allows State Governments to decide whether or not to permit FDI in multi-brand retail in their States in a move to appease regional political parties that are strongly opposed to liberalization in this sector.

The Government also relaxed existing rules applicable to foreign retailers seeking to own 100 per cent of their Indian single-brand ventures. The previously mandatory requirement to source products for up to at least 30 per cent of local sales only from Indian small and medium enterprises has now been made optional.

Air transport sector

In a major move for the civil aviation sector, the Government decided to allow foreign airlines to buy up to 49 per cent stakes in local scheduled and non-scheduled air carriers, thereby paving the way for strategic investments in this sector. Investments by a foreign airline will require prior Government approval and is subject to certain conditions, such as substantial ownership and effective control of the airline remaining with Indian nationals. While previously FDI was permitted in the Indian aviation sector, foreign airlines were not allowed to invest.

Other announcements

Decisions to permit increased foreign investment in the broadcasting sector and opening up of the power trading sector to foreign investment were also announced.

The new policy, in particular opening up multi-brand retail, is hugely controversial in India. In a positive sign for investors, it appears that the Indian Government has not been deterred by political pressure while looking to correct the recent downward trend of Indian economic growth.