How India has changed its foreign direct investment limits

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Attractive sectors

The graph below shows the sectors that have attracted the most foreign money since April 2000. The booming services sector has been the most attractive. After the services sector comes the construction and telecommunications sectors, both of which have seen tremendous growth in the past decade.

Percent to total inflows (Apr 00-Sep 14)

While these sectors still remain attractive, there are a few others that foreign companies want to invest in, but have been unable to because of a strict cap and other regulatory hurdles.

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Ceiling raised

A cap on foreign direct investment (or FDI) in sectors like retail and defense was a major hindrance for foreign business in either setting up their own shop in India or investing in an existing business. Further, for defense and construction development sectors, the lock-in period of investment is three years. Meanwhile, for most other sectors, this period is only one year.

The government has allowed 100% FDI in the telecom and single-brand retail sectors. Further, the FDI limit of 26% in the defense sector has been raised to 49% under government approval route. FDI beyond 49% is also allowed on a case-by-case basis with the approval of the Cabinet Committee on Security.

This is positive news for defense contractors like Lockheed Martin (LMT), Northrop Grumman (NOC), which has been working with the Indian armed forces and Indian industry for more than 25 years. This is also positive news for General Dynamics (GD), which has a subsidiary in India, and Raytheon (RTN), which has partnered with Indian companies for over 60 years.

ETFs like the the WisdomTree India Earnings Fund (EPI) and the PowerShares India Portfolio (PIN) also stand to benefit from increased foreign investment into Indian companies.

The following article will give you insight into how Indian equities have reacted to the new government vis-a-vis the reaction of foreign investors.

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