Indian Cabinet Approves Raising FDI Cap In Defence To 49 Per Cent, Opens Up Railways

NEW DELHI: The Union Cabinet on Wednesday allowed foreign investment in the Railways for the first time and raised limit for such investment in the defence sector, steps intended to raise funds for expansion of the Railways and encourage domestic manufacture of arms.

100 per cent foreign investment in railway infrastructure projects will be allowed while in the case of defence the limit has been raised to 49 per cent from the current 26 per cent, subject to the Indian owners exercising management control.

The FDI hike in defence is intended to cut imports by indigenising defence production as India is one of the world’s largest arms importers.

"It is a composite cap, incorporating all forms of foreign investment, FDI, FII, FPI, NRI, etc," said a government official confirming that the proposals has been cleared. Experts did not seem impressed with the cautious stance of the Modi government on defence.

"Good development, but not great. Round one has gone to protectionist forces. 49 per cent is the same as 26 per cent technically and hence may not open the investment floodgates," said Amber Dubey, Partner and India Head of Aerospace and Defense at global consultancy KPMG.

"We hope better judgment prevails and we have the FDI limit enhanced to 74 per cent later this year," he added. Official notifications giving effect to changes will be issued soon, after the minutes of the cabinet meeting are finalised.

Foreign investment in defence will be though the approval route, implying it will have to be cleared by the Foreign Investment Promotion Board (FIPB). Though the 49 per cent cap will be general rule for the defence sector, 100 per cent overseas ownership will be allowed in case the investments comes bundled with state of the art technology. Such investment proposals will have to be cleared by the Cabinet Committee on Security (CCS).

In companies with a 49 per cent foreign holding, more than one Indian company will be allowed to hold the 51 per cent share, unlike the present norm that mandates that a single Indian entity should own and control the entire 51 per cent, a move that will encourage more domestic players to enter the sector.

In case of Railways, 100 per cent FDI will now be allowed in railway infrastructure segments such as electrification, signalling, high speed and suburban corridors. 100 per cent FDI will also be allowed through the Special Purpose Vehicle route to provide last mile connectivity to ports and mines. Further, some railway operations have also been partially opened up to foreign investment.

FDI is now allowed in PPP projects, suburban corridors, high speed train systems, and dedicated freight lines. Estimates suggest that the opening of railways to foreign investors will add 1-1.5 percentage points to the overall GDP growth. China and Japan are keen to invest in the railways sector.

As a result of these changes, railways transport will be removed from the list of prohibited sectors in the consolidated FDI policy.