Budget 2019: To boost growth, FPIs get more leeway

The current FDI in India’s civil aviation sector is limited at 49% through the automatic route, above which government approval is required.

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This is part of the government’s measures to make India a “more attractive” destination for foreign investors, with the focus on a “virtuous” cycle of domestic and foreign investments to help it achieve a $5 trillion economy in the coming years.

THE GOVERNMENT plans to further open up foreign investment in India’s aviation, media and insurance sectors, with Finance Minister Nirmala Sitharaman announcing in her Budget speech on Friday that 100% Foreign Direct Investment (FDI) would be allowed for insurance intermediaries. She also proposed measures to attract more investment from Foreign Portfolio Investors (FPIs), including increasing the statutory limit for FPI investment in a company to match the FDI allowed in the sectors these FPIs are targeting.

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“FDI inflows into India have remained robust despite global headwinds… I propose to further consolidate the gains in order to make India a more attractive FDI destination,” Sitharaman said.

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The government will examine suggestions to further open up FDI in aviation, animation, audio, video, graphics, comics and insurance intermediaries in consultation with “all” stakeholders, she said.

The current FDI in India’s civil aviation sector is limited at 49% through the automatic route, above which government approval is required.

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Opening up investment in this sector may ease the process of finding investors for Air India — the government has tried unsuccessfully to divest its stake in the past — and Jet Airways, which has been grounded since April and is currently undergoing insolvency proceedings. The Union Cabinet last year approved changes in FDI norms to allow foreign carriers ownership of 49% of Air India along with an Indian partner under the approval route.

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India’s FDI inflows in 2018-19 remained “strong” at $64.375 billion, marking a 6% growth over the previous year despite a negative trend in global FDI flows between 2015 and 2018, according to Sitharaman. “An important determinant of attracting cross-border investments is availability of investible stock to the Foreign Portfolio Investors,” said Sitharaman.

“Accordingly, I propose to increase the statutory limit for FPI investment in a company from 24% to sectoral foreign investment limit with option given to the concerned corporates to limit it to a lower threshold,” she said, adding that FPIs will also be permitted to subscribe to listed debt securities issued by Real Estate Investment Trusts (ReITs) and Infrastructure Investment Trusts (InvITs).

Attracting FPI investment, a “key” source of capital for India’s economy, assumes greater significance in view of a “gradual” shift towards passive investments from stock-targeted investments, said Sitharaman.

In order to ensure a “harmonised” and “hassle-free” investment experience for foreign portfolio investors, the minister also proposed rationalising and streamlining the existing Know Your Customer (KYC) norms for FPIs to make it more “investor friendly” without “compromising the integrity of cross-border capital flows.”

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Explained

Wooing foreign investors

The move to permit 100% FDI for insurance intermediaries and bring FPI limits on par with the permissible FDI caps is part of the government’s pledge to make India a more attractive destination for foreign investors. For the aviation sector, the opening up of caps might ease the process of finding investors for both Air India and Jet Airways.

As one of several measures to enhance sources of capital for infrastructure financing, Sitharaman also proposed to permit investments made by Foreign Institutional Investors (FIIs) or FPIs in debt securities by Infrastructure Debt Fund-Non-Bank Finance Companies (IDF-NBFCs) to be transferred or sold to “any domestic investor” within the specified lock-in period.

“We recognise that investment-driven growth requires access to low cost capital,” she said, adding that India is estimated to require investments averaging Rs 20 lakh crore ($ 300 billion) every year.