Private equity firms have welcomed India’s government to ease rules on foreign direct investment (FDI) as likely to attract strategic investment into their portfolio companies and give them more opportunities for exits.

But there is plenty still to be done, noted market participants, and the early-November Bihar election defeat for the ruling Bharatiya Janata Party (BJP) party will not make it any easier to push reforms through. 

The government eased FDI regulations on 15 sectors earlier this month, raising the cap on project approvals through the Foreign Investment Promotion Board to Rs50 billion ($754 million), from Rs30 billion. The changes should help to improve job creation and boost the sectors in question, as well as ensuring faster approval of FDI proposals. 

The changes mean there is a clearer path for foreign firms to have full ownership of Indian operations in certain sectors. This is positive for private equity managers as it should attract more strategic investment into their portfolio companies and help them to make exits through sales to strategic buyers, observed Arvind Malhan, partner at New Silk Route Capital, a Mumbai-based PE firm.

Money should flow into construction/real estate, retail and banking, all of which need significant doses of risk capital, explained Archana Hingorani, CEO at Mumbai-based PE firm IL&FS Investment Managers.

But the biggest immediate beneficiary is likely to be the real estate sector. Rahul Guptan, Singapore-based partner at law firm Clifford Chance, who leads the India capital markets team, said rules on foreign investment into the property sector had been stagnant for some time. This round of amendments deals with several concerns that PE firms and other investors had about Indian real estate. 

Hingorani highlighted defence as another sector to watch out for, with automatic approval of up to 49% ownership now permitted. 

She noted that manufacturers would be allowed to sell products through wholesale/retail or e-commerce platforms without government approval. Additionally sourcing standards for technology-intensive products are being relaxed, which should encourage the development of a deeper manufacturing base. 

Moreover, in certain parts of the media sector, such as cable networks, 100% foreign ownership is now possible, up from 74% previously. 

However, one source suggested that the BJP  could have made these moves earlier, and appeared to have timed the changes to fit its political agenda. The announcement came hot on the heels of the government's defeat in the Bihar state election.

Industry players noted that the poll result has also weakened the BJP's position, which will make it tougher to get future reforms through and may deter investors who wanted to see continuity of the reform process.

And, of course, the government could have gone further, with the opening of the retail segment a step many would like to see, along with liberalisation of the insurance and legal sectors. But market participants noted that these changes were always going to be made in stages.

Ultimately they underscore how the BJP is trying to make India an easier place to do business. Under prime minister Narendra Modi, India is being seen as a nation that foreign investors can no longer ignore.