Indian Government Liberalizes the Aviation, Broadcasting and Power Sectors

October 1, 2012

The Government of India ("Indian Government") has approved a number of significant amendments to India’s foreign direct investment ("FDI") policy in a variety of sectors including aviation, broadcasting, power and retail. Changes to the FDI policy in the retail sector is discussed in a separate client alert "Indian Government Liberalizes Foreign Direct Investment in the Retail Sector" dated September 28, 2012. Changes to the FDI policy relating to the aviation, broadcasting and power sector is discussed below.

Aviation

          Existing Regime

FDI has been permitted in the Indian aviation sector for several years, though participation by foreign airlines had been restricted to only cargo, helicopter and sea plane services.

          Revised Regime

Foreign airlines are now permitted[1] to invest up to 49 percent (which includes both FDI and investment by foreign institutional investors ("FIIs")) in companies operating commercial air passenger transport services, with the prior approval of the Indian Government[2]. This has primarily been done to shore up the performance of domestic air carriers in India.[3] Key requirements for this investment include:

1.   The company in which the foreign investment is being made must have its principal place of business in India;

2.   The chairman and at least two-thirds of the board of directors of the company must be Indian citizens;

3.   Substantial ownership and effective control of the company must vest with Indian nationals;

4.   All foreign nationals likely to be associated with the Indian company as a result of the foreign investment must obtain security clearance before deployment; and

5.   All technical equipment that might be imported into India as a result of such investment must obtain clearance from the relevant authority in the Ministry of Civil Aviation of the Indian Government.

Broadcasting

FDI in companies engaged in providing broadcasting carriage services has also been amended as set forth below[4], subject to terms and conditions as may be specified by the Ministry of Information and Broadcasting of the Indian Government from time to time.

1.   The foreign investment limit in uplinking hubs and teleports, direct-to-home (DTH) and cable networks[5] has been increased from 49% to 74%. While foreign investment up to 49% can be made through the automatic route (i.e., without prior governmental approval), investments in excess of 49% will require the prior consent of the FIPB.

2.   Foreign investment up to 74% has been permitted in companies offering mobile TV services in India. While foreign investments up to 49% can be made through the automatic route (i.e., without prior governmental approval), investments in excess of 49% will require the prior consent of the FIPB.

3.   Foreign investment in cable networks that do not undertake upgradation towards digitalization and addressability is still restricted to 49%.

4.   Foreign investment in companies that uplink/downlink news and current affairs television channel and FM radio stations is limited to 26% with the prior consent of the FIPB. 100% foreign ownership, subject to FIPB approval, is already permitted for the uplinking/downlinking of television channels other than news and current affairs.

5.   Foreign investment limits discussed above include FDI, investment by FIIs, Non-Resident Indians, Foreign Currency Convertible Bonds, American Depository Receipts, Global Depository Receipts and convertible preference shares held by foreign entities. 

6.   Certain mandatory requirements for key executives of the Indian company to be Indian nationals and security clearance of the personnel have also been included.

These changes reflect the intent of the Indian Government to make the foreign investment rules uniform across the telecommunications and broadcasting sectors in view of increasing technological convergence.

Power

          Existing Regime

FDI up to 100% is permitted, under the automatic route (i.e., without prior governmental approval), in the power sector (except atomic energy). The existing FDI policy does not provide for any specific foreign investment guidelines in power exchanges.

          Revised Regime[6]

Foreign investment is now permitted up to 49% in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010, subject to the following:

1.   The 49% foreign investment is subject to an FDI limit of 26% and a FII limit of 23%;

2.   FII investment is permitted under the automatic route (i.e., without prior governmental approval) but the FDI investment is subject to the prior consent of the FIPB; and

3.   FII purchases are restricted to the secondary market only.