The Indian Government has proposed several important measures in an attempt to attract greater investments into India including:-
- proposed changes in the law to allow foreign direct investments ("FDI") in the pension and retail sectors giving foreign investors and foreign companies access to India's growing workforce1 and lucrative retail market;
- the Capital Markets Regulator's raising of foreign institutional investors ("FII") limit in investments in Government securities and corporate bonds by US$5 billion each; and
- the Reserve Bank of India's easing of External Commercial Borrowing ("ECB") norms to allow Indian infrastructure companies to borrow up to an equivalent of US$1 billion in Chinese renminbi.
Foreign direct investment in the pension sector
The Indian Cabinet has approved changes in the Pension Fund Regulatory and Development Bill which opens the pension sector to both private and foreign investment, allowing approved foreign direct investment of up to 26% in the pension fund market. This decision, yet to become law, will enable global financial companies to access a pension fund market that is expected to expand rapidly as millions of young Indians join the work force of Asia's third largest economy. It is anticipated that some of the foreign players now holding a 26% stake in Indian insurance companies will be keen to expand into the pension fund market.
Proposed changes for foreign direct investment in multi-brand and single brand retail
The Indian Cabinet has proposed opening the doors of the Indian retail market2 to foreign investors and foreign retail companies, which industry reports estimate to be worth US$450 billion. The new changes will allow up to 51% FDI in the multi-brand retail market, subject to Government approval. Concurrently the Cabinet has also raised the FDI ceiling in single brand retail from 51% to 100%, subject to Government approval, aimed at boosting foreign inflows into the retail sector and improve its infrastructure. Foreign involvement and investment in retail is aimed at taming current inflation and promoting the supply chain and development of logistics and cold chains in India.
FDI in the multi-brand retail market is subject to the following conditions:-
- the minimum amount to be brought in as FDI by a foreign investor is US$100 million;
- retail sales can only be located in 53 cities, those having a population of more than one million as at the 2011 census;
- the Government will have the first right to the procurement of agricultural products. Fresh agricultural produce (which includes fruits, vegetables, flowers, pulses, grains, fresh poultry, meat products and fisheries) may be un-branded; and
- 50% of the total FDI is to be invested in "back-end infrastructure". Back-end investment comprises investments in processing, manufacturing, distribution, design improvement, quality control, cold chain, warehouses and packaging, amongst others. Expenditure incurred on land costs and rentals will not be counted as back-end infrastructure.
A foreign investor's compliance with the conditions will be ensured through self-certification, subject to cross checking by the relevant authorities as and when required.
FDI in the single brand retail market is subject to the following conditions:-
- products to be sold should be of a "Single Brand" only;
- the foreign investor should be the owner of the brand;
- products should be sold under the same brand internationally (i.e. products should be sold under the same brand in one or more countries other than India); and
- "Single Brand" product retailing would cover only those products which are branded at the time of manufacturing.
A condition applicable to both multi-brand retail in all cases and for single brand retail in cases where the foreign equity exceeds 51% is that 30% of the procurement of manufactured / processed products shall be sourced from small scale industries3 located anywhere in the world.
Raising the ceiling for foreign institutional investors in government securities and corporate bonds
The Indian Government has enhanced the FII investment limit to augment capital flows and to provide greater fiscal resources to Indian companies. This measure is also expected to further develop and strengthen the government securities and corporate bond market. The Securities and Exchange Board of India's circular4 states that FIIs will now be able to:-
- invest up to US$15 billion in Government securities, compared to the current US$10 billion;
- invest up to US$20 billion in corporate bonds, compared with the current US$15 billion; and
- buy bonds of any tenure under the revised US$5 billion cap hike.
The limit for FII investment in long term infrastructure bonds stands unchanged at US$25 billion.
Renminbi borrowings for infrastructure companies
To counteract the high costs of borrowing, India's Central Bank the Reserve Bank of India ("RBI") has issued a circular5 to permit Indian companies in the infrastructure sector to borrow in renminbi ("RMB") through ECB. This significant policy change benefits infrastructure and capital goods companies trading with China. Infrastructure companies6 can now borrow in RMB subject to an annual cap of US$1 billion. The Indian Government, recognising Indian companies' difficulties with high domestic interest rates, will allow them to raise cheaper funds in Chinese RMB. Prior to this, India permitted overseas borrowing only in the US dollar, euro, Japanese yen and British pound. The introduction of these measures also presents a viable business opportunity to Chinese banks given the great demand among Indian companies for loans to reduce the exchange risk in trade financing.