FDI rules eased, more cities to get multibrand retail

Tags: Policy

MSME definition revised, 30% sourcing requirement relaxed

The Union cabinet on We­dnesday tweaked the po­l­icy for FDI in multibrand retail, relaxing the rules on backend investment. FDI norms were liberalised also for a dozen other sectors, with the cap going up to 100 per cent in telecom.

The government also redefined Indian ‘control’ and ‘ownership’ in foreign joint ventures. It has aligned the definition with the parameters set by the market watchdog, Securities and Exchange Board of India (Sebi).

Commerce and industry minister Anand Sharma said global multibrand cha­ins could now set up shops even in towns with less than one million population. But this can be done with the approval of respective states. Earlier the rules allowed multibrand retail chains to set up shops only in 53 cities with one million or more people.

This was one of the key demands of the industry, which felt it necessary for retail chains to work on the hub-and-spoke model, which meant spreading far and wide to take advantage of the economies of scale.

Sharma said the cabinet also relaxed the mandatory 50 per cent investment norm in back-end infrastructure. This will be restricted only to the first tranche of investment of $100 million.

This means a company bringing in $100 million will have to compulsorily invest $50 million in backend operations.

But the norm would not apply to additional investments brought in subsequently, which Sharma said would be based purely on business decisions.

The norm for 30 per cent mandatory sourcing form MSMEs was relaxed by modifying the definition of MSME for this purpose, so that MSMEs from where retail chains source initially can continue to supply even when they become bigger companies later.

Also, an MSME can be any company with an investment up to $2 million, up from the prevailing limit of $1 million. Agriculture commodities and farmers’ cooperatives could also be considered as MSMEs to facilitate supply of goods.

This move will help grow an investor-vendor relationship in multibrand retail, Sharma said. The revised multibrand retail norms were approved by the Union cabinet.

Meanwhile, the cabinet committee on economic affairs has given its green signal to the new definition and parameters determining control over foreign joint ventures.

Accordingly, Press notes 2, 3 & 4 stand amended now. The government stipulated that a foreign joint venture is considered under Indian control in case resident Indians or Indian companies control it via equity or management through the appointment of majority directors.

Indian residents or companies may exercise this control through listing agreements on bourses in the country or abroad. Additionally, it may be done through shareholder agreements.

Opening the doors to shore up foreign investments, the cabinet also allowed higher FDI limits in ‘state-of-the-art’ defence manufacturing, which could be beyond the present 26 per cent subject clearance by the cabinet committee on security on a case-by-case basis, Sharma said.

The FDI cap for civil aviation was, however, left unchanged at 49 per cent.

In the contentious insurance sector, it was decided to raise the cap from 26 per cent to 49 per cent under the automatic route. It means companies need not require prior government approval. A bill to raise the FDI limit in the insurance sector is pending before Rajya Sabha.

An inter-ministerial panel led by prime minister Manmohan Singh had on July 16 cleared the decision to hike limits and change FDI entry routes across 13 sectors. The cabinet by and large endorsed these decisions on Wednesday, Sharma said.

It was decided to allow 49 per cent FDI in single-brand retail under the automatic route, while anything beyond that limit will have to go through the foreign investment promotion board (FIPB).

Besides civil aviation, no view was taken on relaxing FDI caps for airports, media, brownfield pharma and multibrand retail.

In the case of PSU oil refineries, commodity bourses, power exchanges, stock exchanges and clearing corporations, the FDI limit was allowed up to 49 per cent under the automatic route against the current practice of routing it through FIPB.

The relaxation in FDI norms was based on the recommendation of the Mayaram committee, which had suggested relaxing investment caps in about 20 sectors.

In basic and cellular services, the FDI limit was raised to 100 per cent from existing 74 per cent. Of this, up to 49 per cent FDI will be allowed under the automatic route and anything beyond that would require FIPB approval.

A similar dispensation would be allowed for asset reconstruction companies and tea plantation firms. FDI of up to 100 per cent will be allowed in courier services under the automatic route. In the case of credit information firms, 74 per cent FDI would be allowed under the automatic route.

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