DIPP sets tough riders in lifting FDI caps till 49%

Written by Rajat Guha | Rajat Guha | New Delhi | Updated: Jul 22 2011, 05:37am hrs
The governments plan to remove sectoral FDI caps below 49% would come with a set of riders as it wants to closely scrutinise sensitive sectors like insurance, news media and defence once the liberal regime is in place. The department of industrial policy and promotion (DIPP), which earlier suggested 49% as the lower threshold for FDI cap, now wants to make it mandatory for all joint ventures seeking approval to increase foreign investment to 49% to have Indian citizens as their MD and CEO. Such firms should also have a government-nominated director on their boards.

The government will also scrutinise the balance sheets and other company statements to ensure there are no changes in ownership structure or control. In case of JVs in the defence sector, if the FDI is to the extent of 49%, such companies will have to compulsorily go public. The government will also make laws to restrict such joint ventures from making changes to initial investment agreements. Other conditions could be a minimum lock-in of three years for foreign funds before they can be repatriated.

According to sources, the DIPP is preparing a Cabinet note detailing these riders. Before the proposal is brought to the Cabinet, it will be circulated among other ministries for their comments.

Once the policy of having a minimum 49% FDI comes into force, the sectors that will benefit the most are defence, news media and insurance, where FDI is now capped at 26%. The case of multi-brand retail would come within its ambit once the government decides to throw open this sector to foreign investment. A committee of secretaries is already working on the contours to open the sector to FDI.

Last month, the DIPP had issued a discussion paper making a case for removing FDI caps below 49%.The reason was that current regulations allow foreign companies to invest in downstream sectors through an Indian-owned holding company. This way, such foreign companies can have investments in such downstream sectors up to 49%. In such a scenario, it is felt that any cap below 49% becomes superfluous.

These FDI limits are artificial and are often breached through a complex web of subsidiaries. We now have enough experience with FDI in the country. The time has come to open most of the sectors, especially multi-brand retail and defence," said Saroj Jha, senior partner at the Delhi-based law firm SRGR.

However, increasing FDI caps in sectors like news media and insurance is a politically sensitive issue. In the case of insurance, the government will have to make the necessary changes by amending the IRDA Act, which would require the approval of the Parliament.