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India – Foreign Direct Investment (FDI) In The Rail Sector.

24 November, 2014

 

Legal News & Analysis – Asia Pacific – India – International Trade

 

The Government of India has galvanised the Indian railway sector with the much awaited announcement of Foreign Direct Investment. This sector has witnessed many major challenges. Some of challenges confronting the railways sector in India are lack of rail connectivity in vast tracts of hinterland; railways being expected to earn like a commercial enterprise but serve like a welfare organization; surplus revenues declining; lack of adequate resources for its development works; share of railways in freight traffic coming down consistently; lack of resources for maintenance and improving safety works. 


The investment friendly regime in New Delhi is on the course to implementing the announcement of allowing FDI in railways, made in the Union Budget 2014-15. The Government of India has revised its existing policy of imposing restrictions on foreign investment in the railways by liberalising the FDI limit to 100% on ‘Automatic’ route in the rail infrastructure sector1. Accordingly, it has been decided to permit FDI in certain construction, operation and maintenance activities of the railways transportation sector. To date the Government had reserved railway industry for public sector2


Key Changes 


1. FDI in rail infrastructure up to 100% will be cleared through automatic route, which means no approval from the Foreign Investment Promotion Board would be required. However, proposals involving FDI beyond 49% in sensitive areas from a security point of view would have to be brought by the Ministry of Railways before the Cabinet Committee on Security for consideration on a case to case basis.


2. The railway infrastructure where FDI is now permitted will include construction, operations and maintenance activities in the following:

 

  • Suburban corridor projects through PPP
  • High speed projects
  • Dedicated freight lines
  • Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities
  • Railways electrification
  • Signalling systems
  • Freight terminals
  • Passenger terminals
  • Infrastructure in industrial parks pertaining to railways line/sidings including electrified railway lines and connectivity to main railway line
  • Mass Rapid Transportation Systems

The FDI in the abovementioned activities is open to private sector participation subject to sectorial guidelines of the Ministry of Railways.


3. The FDI continues to remain prohibited in Railway Operations.


4. The definition of ”Infrastructure”3 has now been modified to include ‘railways line/sidings including electrified railway lines and connectivity to the main railway line’, in addition to the existing activities that were already covered in the definition of infrastructure such as “facilities required for functioning of units located in the Industrial Park includes roads (including approach roads), water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning”.

 

5. The definition of “Common Facilities”4 has now been modified to include the terms ‘railway line/sidings including electrified railway lines and connectivity to the main railway line’ in addition to the existing activities that were already covered in the definition of Common Facilities such as “facilities available for all units located in the industrial park, and include facilities of power, roads (including approach roads), water supply and sewerage, common effluence treatment, common testing, telecom services, air conditioning, common facility buildings, industrial canteens, convention/conference halls, parking, travel desks, security services, first aid centre, ambulance and other safety services, training facility and such other facilities meant for common use of the units located in the Industrial Park”.


Conclusion


This long overdue measure has come at a time when the Indian Railways require funds to modernise and ramp up capacity to serve the rapidly growing needs of the economy. This liberalisation should help provide railways the much needed resources to modernise and upgrade its operational capacity while attracting newer technology and increasing the internal resource generation.

 

End Notes:

 

1. Notification No.S.O.2113(E), dated 22 August 2014


2. Exemption of Certain Classes of Industrial Undertakings from Certain Provisions of Act (Notification No: S.O.477 (E) dated 25-Jul-91)


3. In the context of Industrial Parks (Para 6.2.12.1 (ii) of the Consolidated FDI Policy)


4. In the context of Industrial Parks (Para 6.2.12.1 (iii) of the Consolidated FDI Policy)

 

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For further information, please contact:

 

Jay Cheema, Partner, Clasis Law

jay.cheema@clasislaw.com

 

International Trade Law Firms in India

 

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