Government raises foreign investment limits
Last month we provided an overview of the regulation of foreign investment into India.
The Indian Government continues to liberalise foreign investment regulation. Recently, it has raised the limits of permitted foreign investment in the following sectors:
- credit information companies (CICs), up to 49 per cent (total foreign direct investment (FDI) + foreign institutional investor (FII) limit)
- subject to specific approval by the government and regulatory clearance from the Reserve Bank of India (RBI)
- FIIs can invest up to 24 per cent in listed CICs subject to overall cap of 49 per cent
- no single entity can hold more than 10 per cent
- no board representation
- commodity exchanges up to 49 per cent (total FDI + FII limit)
- specific government approval required
- FII can invest up to maximum of 23 per cent and FDI – 26 per cent
- FII purchases should be restricted to the secondary market only
- industrial parks up to 100 per cent
- minimum 10 units and no single unit occupies more than 50 per cent allocable area
- not less than 66 per cent of total allocable area
- civil aviation sector
- airports
- greenfield projects – up to 100 per cent under automatic route
- existing projects – up to 100 per cent with prior government approval beyond 74 per cent
- air transport services
- foreign airlines cannot participate in the equity of companies operating scheduled, non-scheduled and chartered airlines
- foreign airlines can participate in equity of companies operating cargo airlines, helicopter and sea place services
- FDI up to 49 per cent and investment up to 100 per cent by non-resident Indians (NRIs) allowed under automatic route in scheduled air transport service/ domestic scheduled passenger airlines
- FDI up to 74 per cent and investment up to 100 per cent by NRIs allowed under automatic route in non scheduled air transport services/ non scheduled airlines, chartered airlines and cargo airlines
- FDI up to 100 per cent allowed under automatic route in helicopter services/ sea plane services
- petroleum and natural gas sector
- up to 100 per cent under automatic route in exploration, petroleum product marketing, petroleum product pipelines, natural gas/LNG pipelines and petroleum refining in private sector
- earlier limit of 26 per cent increased to 49 per cent (with prior government approval) in petroleum refining by public sector undertakings
- up to 100 per cent in trading and marketing of petroleum products. There is no requirement to divest up to 26 per cent within five years for these companies.
- titanium bearing minerals and ores
- up to 100 per cent with government approval in mining and mineral separation of titanium bearing minerals & ores (Ilemite, rutile and leucoxene and zirconium bearing minerals including zircon), their value addition and integrated activities
- value addition facilities to be set up in India
Separately, there are reports that the government is considering opening up investment to foreigners in the retail sector where the investment is undertaken using a foreign brand.
New mining policy tabled
The new mining policy which was tabled by the government in Parliament aims at making it easier for foreign and domestic firms to invest in the exploration and mining of gold, diamonds and metals such as copper and zinc, and for prospecting companies to automatically obtain a mining licence. The policy provides that foreign equity investment in joint ventures for exploration and mining promoted by Indian companies will be encouraged.
It is also expected that the revenue from minerals will be rationalised to ensure that the mineral bearing states get a fair share of the value of minerals extracted from their grounds. State governments have been demanding a switch from a flat rate on minerals to royalties based on their value. India is a large exporter of iron ore to China.
Activity expected on competitive bids for coal blocks
The government has indicated that in future, allotments of coal blocks will be done through international competitive bidding. Currently private sector coal mining is available only for captive use and not for commercial mining.
Companies gear up for legal battles concerning derivatives
The core of the debate is whether derivative products issued by banks were sold for genuine hedging needs or for speculation. In order to minimise the cost of the loan and interest costs, many companies have entered into currency swap option transactions and interest swap option transactions, based on the advice of banks. This is possible only in case of a genuine underlying commercial transaction, failing which, these contracts become purely speculative and purely speculative contracts or wagers are not valid.
New city gas pipelines regulations notified
Infrastructure development and expansion continues to be an important focus for India and investors in India.
In March, the Petroleum and Natural Gas Regulatory Board (PNGRB) of India brought into force the following regulations:
- PNGRB (Exclusivity for City or Local Natural Gas Distributions Network Regulations), 2008 (Exclusivity Regulations)
- PNGRB (Determination of Network Tariff for City or Local Natural gas Distribution Networks and Compression Charge for CNG) Regulations, 2008 (Tariff Regulations), and
- PNGRB (Authorising Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008 (Authorising Entities Regulations).
These regulations apply to both existing players who are laying, building or operating or expanding a city gas network, or potential players who are interested in doing this business.
The rationale for granting exclusivity is to promote the development of an integrated network by a single entity, ensuring that the ramp up for meeting end consumers’ requirements is quicker and, being a single entity, easier for the PNGRB to monitor service obligations.
The Tariff Regulations provide that the tariff will be determined on the basis of the following:
- reasonable rate of return shall be the rate of return on capital equal to fourteen per cent post tax
- return of total capital shall take into account common infrastructure, online compressors
- calculation of Gross Fixed Assets
- operating costs of common infrastructure and online compressor facilities, and
- adjustment against volumes of city gas which are transported and compressed.
The Authorising Entities Regulations will apply to both existing and new players. Existing players run a risk as the PNGRB has the right to reject and select appropriate entity for the business. Various service obligations have been prescribed.
We will be writing more on infrastructure investment in future India Updates.
This article was written by Prashanth Sabeshan, Senior Legal Associate, Melbourne
Freehills India team
India continues to be an important focus for Freehills.
Freehills is the Australian law firm of choice for many leading Indian companies investing in Australia (and not to mention SE Asia – we won the India Deal of the Year award for Tata Power’s acquisition of PT Kaltim Prima Coal and PT Arutmin Indonesia).
In addition, we have been one of the most active if not the most active Australian law firm in India.
We have excellent relationships with the leading Indian law firms, investment banks, and the Big 4 accounting firms in India.
Freehills is committed to strengthening its India practice group and have recently employed several India qualified lawyers. The mix of Indian lawyers based in our Sydney and Melbourne offices and Australian lawyers with India experience enhances the understanding of the Australian-Indian investment and capital flows.
We also claim to have a thorough understanding of Indian-Australian cricket rivalry, not to mention the Indian Premier League, with a range of views amongst the team on these important subjects.
The Freehills' core India team has been involved in advising several major Australian companies on their investments into, and operations in, India.
More information
For information regarding possible implications for your business, contact a member of the India team.