• FDI under the automatic route permitted for certain activities in the railways sector.
  • The sectoral cap for FDI in defence increased, however it continues to be under the government approval route.
  • Approval of the Cabinet Committee on Security may be required in cases of investment above 49% in both railways and defence sector.

INTRODUCTION

The Department of Industrial Policy and Production (“DIPP”) has on August 26, 2014 raised the sectoral cap for the much-contended Foreign Direct Investment (“FDI”) in the defence sector. It has allowed FDI up to 49% under the government approval route along with several conditions that are required to be satisfied.

The DIPP has also introduced FDI in the railways sector on August 27, 2014. The railways sector was liberalized by the Ministry of Commerce and Industry (“Commerce Ministry”) earlier on August 22, 2014. FDI in railways is now allowed up to 100% under the automatic route.

These announcements have been made by way of press notes issued by the DIPP and have the effect of amending the Consolidated FDI Policy Circular 2014 (“Consolidated FDI Policy”) which has been in effect since April 17, 2014. These decisions have been brought into force with immediate effect.

FDI IN RAILWAYS

FDI in the railways sector was a much necessary measure in order to improve the infrastructure of the cash-strapped sector which is one of the most widely used mode of transportation serving around 23 million passengers every day.1 The revenue earnings of the railways sector are very low as compared to the expenditure incurred by it thereby leaving behind a very meager surplus. As per the budget speech of the railway minister for the year 2014-15, in the year 2013-14, the gross traffic receipts were INR 1,395,580 million and the total working expenses were INR 1,303,210 million, which works out to an operating ratio of almost 94%.2 The minister had highlighted that the surplus, after paying obligatory dividend and lease charges is estimated to be only INR 6,020 Million in the current financial year. This meager surplus is inadequate to finance the extensive plan outlay for safety, capacity expansion, infrastructure, improving passenger services and amenities of the railways.

Considering the current cash crunch faced by the railways sector, permission for FDI was a much appreciated move for modernization and development of the railways infrastructure. The government of India by a notification numbered S.O. 2113 (E)3 dated August 22, 2014 (“Notification”) has revised the list of industries reserved for the public sector and has permitted private investment in certain activities pertaining to the railways sector.

FDI has now been permitted in the railway transport sector, which was prohibited under the Consolidated FDI Policy (except for mass rapid transport systems, where it was permitted). In 2001, FDI up to 100% was permitted under the automatic route for mass rapid transport systems in all metropolitan cities, including for the associated commercial development of real estate.4 Now, FDI has been permitted in railways subject to the following conditions:

  • sectoral guidelines issued by the Ministry of Railways (“Railway Ministry”) (though no guidelines have been issued till date).
  • proposals involving FDI beyond 49% in sensitive areas will have to be brought before the Cabinet Committee on Security (“CCS”) for consideration by the Railway Ministry from a security point of view.

The revised policy and Notification allows FDI in the construction, operation and maintenance of only the following:

  • Suburban corridor projects through Public Private Partnership (“PPP”) model: The revised policy has included suburban corridor projects in the list of activities permitted for FDI. Suburban corridor projects are the railway lines which enable the population living in the suburbs to travel to the city. The need for a PPP model for modernization of the railways sector was felt a few years ago.5 It was decided to commission private investment in railways during the 12th and 13th five year plans for the redevelopment of stations, certain high speed and elevated rail corridors, private freight terminal other freight schemes, port connectivity projects, logistic parks, locomotive and coach manufacturing units etc.6 A press release issued by the Railway Ministry on August 1, 2014 had communicated that a few of the PPP projects operating under Indian railways, such as the Surendranagar-Pipavav gauge conversion project, Hassan-Managalore guage conversion project, Gandhidham-Palanpur guage conversion project have been profitable.7
  • High speed train project- High Speed Rail Corporation of India Limited (HSRC) has been formed on the directions of Ministry of Railways, Government of India, for development and implementation of high speed rail projects. This Special Purpose Vehicle was incorporated in 2012 as a subsidiary of Rail Vikas Nigam Limited which is a Mini-Ratna public sector enterprise of Government of India. Currently there are no high speed train projects in India. There are two proposed projects which are in a nascent stage.8

In February 2014, Economic Times reported quoting Alstom, builder of France's TGV high-speed trains, that India is at least 5–10 years away from high-speed trains. According to him, India cannot just jump into the trains with average speed of above 350 kmph, before upgrading the trains to the average speeds from 80 to 120 kmph. Indian trains do not have a good track record in average speed though trains have maximum operating speed of 130-150 kmph.9

  • Infrastructure in industrial park- The revised policy has also revised the definitions of infrastructure and common facilities in relation to industrial parks in the Consolidated FDI Policy to include railway line / sidings including electrified railway lines and connectivity to the main railway line. Railway sidings are low speed tracks which connect the main tracks. They are used for lower speed or less heavy traffic.
  • Freight lines, rolling stock including train sets, locomotives/coaches railway electrification, signaling systems, freight terminals, passenger terminals: Freight lines are the specialized lines only for the movement of freight in order to reduce the burden on passenger lines. Rolling stock are the locomotives, cars, coaches and wagons.
  • Mass rapid transport system (“MRTS”): MRTS are means of transport for quick travel within the city for a large number of people. The Urban MRTS includes metro projects in cities such as Mumbai, Bangalore and Delhi.

FDI IN DEFENCE

India is one of the largest importers of arms in the world and thus incurs huge expenditure on defence. The expenditure on defence as a percentage to the GDP of India for the period from 2009-13 was 2.4%.10

While the defence sector was liberalized in 2001, FDI in defence had been permitted only up to 26% under the government approval route. The erstwhile conditions relating to the defence sector failed to attract sufficient foreign investment. The contribution of the defence sector to the total FDI inflows of approximately INR 10,870,684 million is only INR 243.6 million for the period from April 2000 to June 2014.11

While the Commerce Ministry had mooted raising the level of foreign investment in the defence sector, the Ministry of Defence (“Defence Ministry”) was opposed to it. On one hand it was contended that FDI in defence will enable India access to modern technology and reduce the level of imports, on the other hand, it was believed that FDI in defence will affect the internal security of the country and may also not actually result in transfer of technology to India because of the restrictions imposed on such transfer by the host government. Finally, the level of foreign investment in the defence sector has been raised by the ministry.

KEY CONDITIONS FOR INVESTMENT

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ONCLUSION

FDI in defence and railways was a much awaited measure for modernization, improvement of infrastructure in these sectors and to ensure technology transfer. However, due to the presence of conditions which may restrict FDI, especially in the defence sector, and the levels of approval that may follow, we are unsure of the impact that it may create to attract foreign investors.