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Monday, April 5, 2010

Favours check on downstream investments by firms with minority foreign shareholders. The finance ministry has proposed to tighten the foreign direct i

Favours check on downstream investments by firms with minority foreign shareholders. The finance ministry has proposed to tighten the foreign direct investment (FDI) regime in the country. It has sought to route a larger number of investments by companies where the foreign stakeholding is less than 50 per cent through the Foreign Investment Promotion Board (FIPB). Such investments are currently under the automatic approval route. The proposal implies a significant tightening in the controversial Press Notes 2, 3 and 4 of 2009, which had redefined the FDI policy in the country. According to these Press Notes, corporate entities which had less than 50 per cent foreign equity, but where the control was exercised through Indian promoters and companies, were to be treated as Indian companies. Thus, such companies could make any downstream investment even if the sector had an FDI cap without taking clearance from the FIPB. “Control” in a company had been defined as the power to appoint a majority of the directors to the board of the company. The finance ministry proposal now envisages that an investing or an operating company with less than 50 per cent foreign ownership would be permitted to make downstream investment through the automatic route only in sectors where 100 per cent foreign investment is allowed. These include sectors like floriculture, mining, power, hazardous chemicals and industrial explosives. For sectors with foreign investment caps or those which require clearance by FIPB in the normal course, investment proposals from companies with even less than 50 per cent foreign equity would require FIPB approval. These companies would also be barred from investing in prohibited sectors. These include atomic energy, retail trading (except single-brand product retailing), the lottery business and gambling and betting. These changes, being pushed by the finance ministry, will be discussed at a meeting in Delhi on Tuesday. Representatives from the Department of Industrial Policy and Promotion, Department of Financial Services, Ministry of Corporate Affairs, Department of Legal Affairs and the Reserve Bank of India have been called to sort out the issues. The concern that is driving the finance ministry is: What cannot be done directly must not be capable of being done indirectly. The Press Notes had come under fire, as many within industry and government had said that this would make redundant the government policy of having FDI caps in various sectors like retail, telecom, defence production, print media and cable network. Also, this would give foreign investors a backdoor route permitting them to breach FDI caps in various sectors. However, the Ministry of Commerce, which had pushed through the new press notes last year, has made it clear that companies owned by resident entities (where less than 50 per cent of the foreign equity is foreign) do not have to go to FIPB, as this would increase the administrative burden. The finance ministry has, however, opined that the disclosure of agreements impinging on “control” is voluntary. It has also said that agreements are liable to change with the passage of time, or simply that control which is with the Indians could pass on to foreigners without anyone knowing. The finance ministry has said that the FDI policy needs to be changed, as investment in prohibited sectors even by entities which are ostensibly Indian-owned and controlled but have foreign equity, should not be allowed.

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