State control of vital sectors a must, says Mayaram panel on FDI

The Arvind Mayaram Committee, set up by the finance ministry to study liberalisation measures in India's foreign direct investment (FDI) policy, has segregated nine sectors categorised as those in which Indian ownership and control is a must.

These are FM radio, uplinking news and current affairs, print media (news and current affairs), commodity exchanges, stock exchanges along with depositories and clearing corporations, power exchanges, petroleum & natural gas refining, insurance, defence production, and private security agencies.

On the liberal side, the committee's recommendations are expected to pave the way for the Jet-Etihad deal, which is stuck in its final stages. It has recommended amendment of the stipulation under the civil aviation requirements that effective control and ownership be retained with Indians in airlines. It has proposed to raise the FDI cap in airlines to 74 per cent.

The committee has suggested that FDI be capped at 49 per cent in nine special sectors and in other cases (except for defence production and private security agencies) clearance should be automatic. It has clarified FDI will not include portfolio investments in two of these sectors - insurance and oil refining.

To protect India's strategic interests in defence production and private security agencies, foreign investments in these sectors will not be cleared via the automatic route and will be subject to FIPB (Foreign Investment Promotion Board) scrutiny.

The Mayaram panel has said that despite 51-per cent foreign investment, firms in these sectors will be under Indian ownership and control. The definition of control is being worked out.

The recommendations, if accepted, will mean significant liberalisation. This is because in some sectors, such as commodity exchanges, stock exchanges and power exchanges, though up to 49 per cent FDI is allowed, the proposals currently need to be vetted by FIPB.

The panel has also proposed increasing the FDI cap for the insurance sector from the current 26 per cent to 49 per cent. But that will require an amendment to the Insurance Act which is pending in Parliament.

Additionally, the committee has proposed that FDI cap for FM radio, uplinking of news and current affairs, and publishing of periodicals and newspapers dealing with news be raised from 26 per cent (including foreign institutional investors) to 49 per cent. It has also suggested that these investments should be approved through the automatic route, and not go through the FIPB.

However, foreign investment in these sectors will require licensing by the information & broadcasting ministry and security clearance by the home ministry.

Prime Minister Manmohan Singh will discuss these recommendations with senior ministers early next month. After that, it will be taken up by cabinet by third week of July.

The panel has suggested that sectors where Indian control and ownership are not material, 100 per cent foreign investment be allowed.

Among these categories are telecom, mining, single-brand retail, pharmaceuticals, holding companies, asset reconstruction companies, and the tea sector, including plantations.

However, after an entity ceases to be under Indian ownership and control, the foreign investment will have to come from the FIPB.

Telecom currently has 74 per cent FDI cap, while single-brand retail can take 100 have FDI but only through the FIPB.