Narendra Modi government has eased Foreign Direct Investment (FDI) rules as the Union Cabinet today allowed 100 per cent in single brand retail and 49 per cent in Air India. Currently, FDI up to 49 percent was allowed under automatic route but any investment beyond the limit needed government approval.
Further, this nod has come with two conditions. The first one is that the foreign investment including that of foreign Airlines, should not exceed 49 per cent either directly or indirectly and secondly, the substantial ownership and effective control of Air India would continue to be vested in Indian national.
Meanwhile, today’s decision will benefit big foreign single-brand retailers such as IKEA, Carrefour and Walmart. However, the Confederation of All India Traders (CAIT) has strongly opposed the government decision, saying that today’s move will facilitate easy entry of MNCs (multi-national companies) in the retail trade.
Moreover, Union Council of Ministers has allowed 100 per cent FDI under automatic route in construction development. Foreign Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs) are also allowed to invest in power exchanges through primary market.
Air India divestment made easier
Today’s reforms given by Union Cabinet will accelerate government’s plan of divesting its stake in Air India by approving the foreign airlines to own up to 49 percent of the loss-making national carrier. The 49 percent cap on the holding of foreign airlines in Air India is a part of the total permissible limit of 49 percent on foreign investment in the carrier.
The divestment of the government’s stake could take place in 3-6 months of time horizon. The government has appointed all the necessary advisors to value the airline and advise on the stake sale. Air India has a debt of around Rs 52,000 crores. At present, Interglobe Aviation, that runs IndiGo Airlines, have officially expressed their intent to buy the national carrier.
Stock Market Reaction on FDI
Today the market closed on the flat note, though the market was high in early trade. This was due to the weakness in the Asian stocks while the oil prices surged to three-year highs due to production cuts and a fall in inventories. However, the retail stocks were in demand due to the FDI policy, through automatic route in single-brand retail. Future Enterprises (up 5.11%), Provogue (India) (up 4.93%),V-Mart Retail (up 3.44%), Shoppers Stop (up 2.32%), Trent (up 1.47%) and V2 Retail (up 1.27%), edged higher. Future Retail fell 1.61%.
However, most of the cement stocks were down. Intially, after the policy most of the Power generation and power distribution stocks had risen.