21 Jun 2016 13:46 IST

Airlines, pharma firms to see funds infusion; little change in retail sector

Stock market cheers aviation firms, largely ignores airport operators

The Centre is attempting to make the best use of the positive investment sentiment towards India by easing FDI restrictions in a number of sectors.

Domestic airline and pharma companies could now find it easier to raise additional funds. It has also smoothened the path for foreign single-brand retail companies to open shop in India.

Funding flexibility

The easing of FDI norms in civil aviation saw airline stocks take off on Monday. Jet Airways, SpiceJet and InterGlobe Aviation (IndiGo Airlines) shot up 6-8 per cent.

The big policy change is the increase in FDI limit in airlines from 49 per cent to 100 per cent. This comes with ifs and buts, though. One, any increase beyond 49 per cent would require government approval; this is unlike the current automatic investment route for FDI stake up to 49 per cent.

Next, and more importantly, this increase in limit from 49 per cent to 100 per cent applies to foreign investors, but excludes foreign airlines. The limit for foreign airlines’ investment in Indian carriers stays at 49 per cent.

So, the stake of Singapore Airlines in Vistara and that of AirAsia Berhad in AirAsia India cannot exceed 49 per cent, a limit that is already reached. Etihad can increase its stake in Jet Airways from the current 24 per cent to 49 per cent, but this was possible even under the earlier norms.

Says Peeyush Naidu, Partner, Deloitte: “While the increase in FDI for aviation is welcome as it will allow flexibility, we are unlikely to see investors suddenly rushing to invest in airlines just because the cap of 49 per cent has been removed. Also, investment by foreign airlines is still capped at 49 per cent. So, it remains to be seen whether other investors such as private equity and the like would have the risk appetite to make such investments.”

Even so, airlines will now have more leeway than before to raise funds, thanks to the liberalised norms. This could come handy if things could go bad in this fickle business. No surprise then the market gave a thumbs-up to airline stocks.

But there was no such cheer for stocks such as GMR Infra and GVK Power & Infra, which build and run airports. Earlier, 74 per cent FDI in existing airports was allowed under the automatic route and anything more required government approval; now, 100 per cent FDI in existing airports is allowed under the automatic route. But the market seems to regard this as a non-event, given that even earlier an airport could sell its whole stake, though it was somewhat onerous, needing the government’s nod.

Lost in semantics

Though 100 per cent FDI in single brand retail was allowed in early 2012, it came with strings attached.

Those investing over 51 per cent had to compulsorily source from India 30 per cent of the value of goods purchased over a span of five years. For investors whose products involved ‘state of art’ or ‘cutting edge’ technology, there was provision to relax this rule. However, the terms for providing the relaxation were not clear.

These challenges along with a few other conditions in the policy kept investor interest low. From about ₹205 crore for the year ended March 2012 ( cumulatively since April 2000) FDI flows in single brand retail moved up to only ₹529 crore by March 2014. To attract more investments, a tweak to the 30 per cent rule were brought about in the last two years. Investors such as Ikea, the Swedish furniture store, have benefited from these changes.

The intention of today’s announcement has been to relax the 30 per cent rule further to encourage more inflows. Concerns on this front were recently expressed by Apple, as they were sceptical about meeting local sourcing norms because of the level of technology and skill involved in making their products. But the semantics of the changes announced today don’t make it easy.

Whether the decision to relax local sourcing norms by up to three years implies a total of eight years now, whether this eight years is applicable for all investors including those with state-of-art or cutting edge technology or whether those with products involving high technology will get ten years to comply with the 30 per cent rule instead of the current five, is all not very clear.

That said, the intention to ease foreign investments into India is clear. But there is no immediate reason for local single-brand players such as Gitanjali Gems, Page Industries, Arvind Mills, Lovable Lingerie, Vishal Retail, etc to feel threatened.

Customer sentiments

For one, it will likely take one- two years or more for companies between getting the approval, investing and opening its operations in India. Besides, with diverse customer preferences across the country, understanding customer sentiments and breaking into the market is not going to happen overnight for these players.

With retail not being a high margin business, spreading oneself or achieving economies of scale is not going to be easy either.

Weaker ones benefit

The new FDI policy released by the Centre now permits up to 74 per cent automatic FDI approval for brownfield investment in pharmaceutical companies.

Foreign companies, without seeking the Centre’s nod will now find it easier to invest in existing Indian pharma companies or their facilities. Companies in the mid-cap space are most likely to see some merger and acquisition action. It is also likely that select facilities are spun-off into a separate subsidiary enabling the foreign entity to acquire select assets. Transfer of technology to enable such brownfield expansion can also boost value.

While most well run pharma companies may not benefit or take up the offer when approached, weaker ones who are willing to seek an exit route may now find it simpler.

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