India reconsiders FDI regulations

India's government has put forward proposals to ease restrictions on foreign direct investment, a move that comes as companies in the UAE seek to boost ties with the Emirates' second biggest trading partner.

India's decision to ease ownership restriction is likely to provide further incentives for companies based in the Arabian Peninsula to increase their footprint in the subcontinent. Prashanth Vishwanathan / Bloomberg News
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India's government has put forward proposals to ease restrictions on foreign direct investment (FDI), a move that comes as companies in the UAE seek to boost ties with the Emirates' second-biggest trading partner.

The legislation, pending approval from the country's cabinet, spans an array of infrastructure-related industries, the most significant of which is the telecoms sector that had its limits raised to full control at 100 per cent from 74 per cent. Other sectors likely to benefit from significant relaxation on foreign ownership include oil and gas, power, capital markets and retail.

Indian stocks reacted cautiously to the news, with the S&P BSE Sensex 30 index up 0.4 per cent to 19,948.73.

The easing of foreign investment restrictions comes on the heels of a surprise rate hike from the Reserve Bank of India this week that followed US$8.5 billion in cumulative outflows from rupee bond funds since May, as the former darling of emerging market investors falls out of favour.

"The macroeconomic situation in India isn't very positive," said Gaurav Kashyap, the head of futures at Alpari Middle East, the foreign exchange broker. "Growth has been cut by more than half in two years."

Officials are attempting to stabilise the Indian rupee after it touched a record low this month.

"India is running a current account deficit. A large chunk is related to the fact that its imports being bigger than its exports," said Giyas Gokkent, the chief economist at National Bank of Abu Dhabi.

"A way to finance this deficit is by attracting investment. The highest quality is FDI, because it doesn't have the volatility that portfolios like bonds and equities have."

The decision is likely to provide further incentives for companies based in the Arabian Peninsula to increase their footprint in the subcontinent.

The UAE is India's second-biggest trading partner after China, with bilateral trade at US$72.81bn last year.

"If any obstacles are removed, it's positive from the perspective for the host country. From the perspective of the investing companies its also positive because India is a country that has plenty of potential and an attractive market. It's a win-win situation because investors already want to be there," Mr Gokkent said.

UAE Exchange has applied for a banking licence in India and Qatar National Bank says it will begin operations there during the next three months.

In April, the Nasdaq Dubai said it had partnered with the Federation of Indian Chambers of Commerce and Industry to introduce the Dubai stock market to prospective India-based companies to list.

But many large companies have been deterred from investing in India amid the current risk-averse environment, in which the value of the Indian rupee has sunk 8.6 per cent against the US dollar since the year started, Mr Kashyap added.

Fresh investment in the telecoms sector could total about $3bn to $4bn within the next year and a half, said Kenneth Andrade, group director and head of investments at IDFC Mutual Fund, an Indian asset manager.

However, the insurance sector takes longer to receive benefits because of the need for parliamentary approval.

"The move by the central bank to tighten liquidity was taken an evening before the announcement of the increase in FDI," he said. "Both these moves were targeted at improving the investment climate in the country."

Middle East companies have had a mixed track record of investing in India in recent history. Etihad Airways said in April it would invest US$379 million in Jet Airways, taking a 24 per cent stake in India's second-biggest airline group by market share.