India Clears 100 Percent Foreign Direct Investment, or FDI, In Telecom Services; Relaxes FDI Rules Across Several Other Sectors

India’s Prime Minister Manmohan Singh, on Tuesday, said the government would allow foreign companies to hold a 100 percent stake in companies in the telecom services sector, in a marked shift from the previous policy stance, as Singh's government works hard to restore India's standing as a strong emerging economy and his party's pro-reform image, less than a year ahead of general elections in the country.

The opening of the telecom sector to foreign players is expected to attract massive investment from abroad as the UK-based Vodafone Group Plc (NASDAQ:VOD) and Russian firm JSFC Sistema (OTCMKTS:JSFCF), among others, are expected to grab the opportunity, according to Mint, a local business daily.

“The much-needed policy decision is a very positive development for the entire industry. With fresh foreign direct investments coming in, this would further catalyze growth and also the process of proliferation of telecom services across the country,” a spokesperson for JSFC Sistema’s Indian subsidiary, Sistema Shyam TeleServices Ltd, which provides telecom services under the MTS brand, was quoted as saying by Mint.

The ruling Congress-led United Progressive Alliance, or the UPA, also announced the government's intention to relax caps on foreign direct investment, or FDI, in 11 other sectors including single-brand retail, oil and natural gas, and defense equipment, in a second wave of reforms after the government relaxed FDI rules for multi-brand retail and civil aviation 10 months ago.

The move comes at a time when the government is trying to increase dollar inflows to boost India’s plunging currency and to reverse the economic slowdown, which saw Asia's third-largest economy record its slowest growth in a decade, in March.

Commerce and Industry Minister Anand Sharma said, according to Mint, that the decision to relax foreign investment restrictions was taken following a consensus among key ministers, and that the cabinet would discuss the matter next week.

FDI in the telecom services sector was increased to 100 percent from 74 percent, but all foreign investments above 49 percent will need to be approved by the Foreign Investment Promotion Board, or FIPB.

India, which has allowed 100 percent FDI in telecom equipment manufacturing since the early 1990s, suspended a preferential market-access policy on July 5, which mandates companies, mainly in the telecommunications sector, to source electronic goods from domestic manufacturers.

In the defense equipment sector, FDI proposals in excess of 26 percent will need approval from the Cabinet Committee on Security on a case to case basis, although no limit is mentioned above 26 percent, if the proposal is to produce “state-of-the-art” equipment. This rule represents a gray area in the country's FDI policy, as the defense ministry would determine what constitutes state-of-the-art technology.

The FDI cap in the cash-strapped insurance sector has now been approved by the UPA to be raised to 49 percent from 26 percent, through the automatic route, which does not need prior approval from the government. However, for the new cap to take effect, it has to be approved by the Parliament's upper house where a bill to raise the cap is under consideration.

In the petroleum, natural gas and oil refining sectors, the current limit of 49 percent on FDI will continue, but the procedure to invest has been relaxed, and now, companies do not need to seek prior government approval.

In the single-brand retail sector, the government will continue to allow 100 percent FDI, but investments above 49 percent need FIPB approval.

For exchanges trading in commodities, stocks and power, a foreign investment cap of 49 percent -- 26 percent FDI and 23 percent through foreign institutional investors -- will continue, but through the automatic route, as opposed to being routed through the FIPB as the current rule requires.

Foreign companies will also be allowed to hold a 100 percent stake in asset reconstruction firms, up from the current cap of 74 percent, although proposals above 49 percent need government approval.

Credit information companies can now invest 74 percent without government permission, up from the 49 percent through FIPB route under current regulations. And, the tea industry, which has been allowing 100 percent FDI with the government's approval can now receive 49 percent FDI through the automatic route.

The proposed relaxation of these FDI caps need to be approved by the cabinet, which is expected to meet next week, and it is expected that they will be approved. The exception being FDI in insurance, which needs parliamentary approval and is said to be facing resistance from opposition parties.