FDI rules in for major overhaul
Surajeet Das Gupta & Rituparna Bhuyan
The government has proposed extensive changes in the guidelines for Foreign
Direct Investment that could impact a range of industries such as telecom,
infrastructure, real estate and broadcasting.
The changes include such measures as including investments by non-resident
entities in sectoral limits, removing Foreign Institutional Investment towards
calculating sectoral equity limits with caveats and withdrawing key norms in
Press Notes 3 (1997) and 9 (1999) on 100 per cent foreign holding companies and
their downstream investments.
These proposals were part of a note prepared by the commerce ministry and
discussed by the Cabinet committee on Thursday. They are aimed at liberalising
the FDI regime not only to attract more foreign investment against the
background of a global liquidity crisis but to standardise procedures across
various sectors.
FDI inflow touched $17.1 billion between April and September this year, a 137
per cent growth over $7.2 billion in the same period last year.
The relaxations will apply to those sectors that have composite limits (FDI
plus FII) and for which there are no separate statutes or rules that
specifically govern FDI.
If the new norms are cleared, companies will get six months to comply.
The note suggests that the changes be implemented in phases.
The first phase, which was discussed on Thursday, will finalise methods for
calculating direct and indirect foreign equity in Indian companies.
This includes counting investments by non-resident entities (non-resident
Indians and Overseas Corporate Bodies) directly in an Indian company as FDI.
NRI investments currently do not figure in the sectoral FDI limits.
According to the proposed guidelines, if a company based in India declares that
a foreign firm has a "beneficial interest" in it, any investment made by the
Indian company in another domestic firm will be considered FDI.
Indirect foreign investment through an investing company would not be
considered in calculating foreign investment if it is controlled and owned by
resident Indian citizens. This will apply if 50 per cent of the company is
"owned" by a resident Indian citizen or the resident Indian has the power to
name a majority of board directors in the company.
In the second phase, the government will consider the issue of excluding FII
investment in calculating sectoral limits, but a deadline has not been given.
This adjustment has been widely demanded by domestic and foreign investors.
The move will be a major plus for telecom companies many of which are close to
their 74 per cent equity FDI cap because of FII investments.
Some exceptions, however, remain such as if the FIIs choose to invest under the
FDI scheme or when they submit a declaration that they are acting in concert
with any of the companies that have invested in the Indian company.
To simplify procedures, the government has proposed withdrawing Press Notes 3
and 9.
Press Note 3 of 1997 specifies that a foreign company will have to secure
Foreign Investment Promotion Board (FIPB) approval to set up holding companies
in India.
Press Note 9 of 1999 relaxed the conditions for setting up holding companies
and said foreign-owned Indian firms need not take FIPB permission to make
downstream investments in sectors open to foreign investment.
The note said these notifications would lose their relevance once the new norms
for direct and indirect foreign equity in an Indian company come into force.
http://www.rediff.com/money/2008/nov/07fdi-rules-in-for-major-overhaul.htm
"Some cause happiness wherever they go; others whenever they go."
- Oscar Wilde
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