Nov 7, 2008

India - FDI rules in for overhaul

Surajeet Das Gupta & Rituparna Bhuyan

To delink FII investment in certain cases.

The government has proposed extensive changes in the guidelines for foreign direct investment (FDI) 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 (FII) 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 today. 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 today, 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.
* Investment by Indian companies in which foreign firms have beneficial investment will be counted as direct FDI
* Indirect foreign investment through an investing Indian company would not be considered for the calculation of foreign investment if the Indian company is ‘owned’ and controlled by resident Indian citizens
* Direct investments by non-resident entities to be counted as FDI
* Investments by FIIs not to be counted towards sectoral equity cap
* Removal of Press Note 3 (1997) and Press Note 9 (1999) meant for 100% holding companies

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 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.

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