Budget 2018: Liberalised FDI norms may benefit retail, Air India, but audit restrictions remain bottleneck

Over the past few years, the Narendra Modi-led government has been actively liberalising foreign direct investment routes, with the intention of further easing the FDI regime in India in order to improve the ease of doing business in India. The present set of reforms introduced by the government, which come in the backdrop of the World Economic Forum in Davos which saw the Indian delegation, led by Modi, generating further interest amongst foreign investors. [caption id=“attachment_4324693” align=“alignleft” width=“380”] File image of Arun Jaitley. AFP[/caption] Single brand retail The announcement of allowing 100 percent FDI in the single brand retail (SBRT) sector and the tweaks made to local sourcing norms may entice global retailers who are yet to set shop in India. The revised norms will permit entities undertaking SBRT and having FDI in excess of 51 percent, to offset additional global sourcing (above current levels) to satisfy the local sourcing norms. This is a welcome step, especially for the apparel industry as a number of brands presently source products from India for their global operations. If such brands increase their sourcing for global operations from India, such increased sourcing can be set off against the requirements under the local sourcing norms. The revised norms will also make it easier for foreign brands to incorporate wholly owned subsidiaries in India without tying up with any local Indian partner, and will thus enable them to exercise greater control over their business in India. Civil aviation That the move to allow foreign airlines to invest in Air India has come at a juncture when the government is in the process of finalising the modalities for the cash-strapped and loss-making national airliner, is a clear indication of the intention of the government in getting competitive bids for Air India. Construction and Development In relation to the construction and development sector, the government has clarified that real estate broking does not amount to real estate business, and is, therefore, eligible for 100 per cent FDI under the automatic route. Power Exchange Similarly, the government has also eased rules for foreign investment in power exchanges, allowing FIIs/FPIs to invest in power exchanges through the primary market. Others The government has also permitted issuance of shares against non-cash consideration like pre-incorporation expenses and import of machinery without requiring government approval for sectors under the automatic route. Further changes in the FDI policy such as aligning FDI on sectors involving foreign investment in an Indian company that is engaged only in the activity of investing in the capital of other Indian companies or LLPs with FDI provisions mentioned in other financial services are significant steps to reduce red-tape. However, surprisingly, amidst all the positive steps taken by the government, it has announced restrictions with respect to appointment of auditors for auditing Indian investee companies, and now, if the foreign investor wishes to engage an audit firm having an international network, the audit of Indian investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network. While the fine print in the press note is awaited, this is a surprising move on part of the government since the rationale for the imposition of the abovementioned conditions is not clear and this may increase the cost of doing business in India if a foreign investor wishes to use the services of its global auditor in its Indian subsidiary. The reforms proposed by the government will certainly improve sentiments amongst foreign investors and are in line with the steady stream of reforms being introduced to liberalise the FDI regime and attract more foreign investment. However, the fine print of these amendments is awaited which will be formalised by way of a press note. The author is associate partner, Khaitan and Co