The Ministry of Finance in India has recently authorised Non-Resident Indians (NRIs) to have 100% Foreign Direct Investment (FDI) in Air India. This change has been accompanied by necessary amendments in the 2019 Foreign Exchange Management Rules. Several key points around this policy decision are worth discussing.
The Background
In March 2020, the Cabinet gave its approval to a policy that allows foreign investment up to 100% by NRIs who are Indian Nationals in Air India using the automatic route. However, foreign investments, including those from foreign airlines, in Air India Limited must not exceed 49%, whether directly or indirectly, unless made by NRIs who are Indian nationals.
New Rules for Investment
The amendment also changed the categories of people who could invest. Previously, Overseas Citizens of India (OCI) were allowed to commit 100% FDI in air transport, but not in Air India. Now, OCIs have been replaced with NRIs who can commit 100% FDI in air transport, including Air India, through the automatic route.
Role of Reserve Bank of India (RBI)
Under the amended rule, the Reserve Bank of India (RBI) is given the exclusive power to issue or interpret the rules regarding 100% FDI of NRIs. Before this development, the RBI needed to consult the Central Government before making such decisions.
Significance of the Amendment
The amendment carries significant implications. It will likely smoothen the divestment process of Air India and positively influence the sale of the national carrier. The effective control and substantial ownership of Air India must remain with Indian nationals after divestment. Besides, the move will lead to increased FDI inflows and contribute to higher investment, job creation, and income generation.
Liberalization of FDI and Global Visibility of Air India
The amendment is designed to liberalise and simplify the FDI policy to make business operations more seamless in the country. It has the potential to boost Brand India while providing global visibility and alternative sources of capital for Air India. It is also expected to expand the investor base.
Need for Privatization
Privatization is crucial as airlines have been under strain due to the Covid-19 pandemic. The government may not be capable of meeting the current demands of Air India, such as providing relief measures for its employees.
Foreign Direct Investment (FDI)
FDI is an investment made by an individual or a firm from one country into business interests located in another country. Typically, FDI happens when an investor establishes foreign business operations or acquires foreign business assets. This includes establishing ownership or controlling interest in a foreign company. It is different from Foreign Portfolio Investment where the foreign entity simply purchases equity shares of a company without gaining control over the business.
Routes for FDI in India
India gets FDI through two routes – the Automatic Route and the Government route. In the former, the foreign entity does not require prior approval from the government or the RBI. In the latter, approval from the government is mandatory. The Foreign Investment Facilitation Portal (FIFP) facilitates single-window clearance of applications through the approval route. The portal is managed by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
