Major Changes in Foreign Direct Investment
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.
STREAMLINING FDI
PHASE I
* 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
PHASE II
* 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.
