In a bid to further streamline the foreign direct investment (FDI) policy, the government is going to classify a 50:50 joint venture (JV) between a domestic firm and an overseas entity as foreign company. All foreign partners, having such joint ventures with an Indian firm, will have to divest at least 0.5% in favour of the Indian partner to retain the status of an Indian-owned company. The clarification regarding 50:50 JVs is expected to be issued by the department of industrial policy and promotion (DIPP) ?the nodal FDI policy-making body of the government?soon.
Since the government redefined the FDI policy last year by bringing about the concept of Indian and foreign-owned companies, this was the only area that required clarification. According to new FDI rules, a company established in India with majority Indian holding is termed Indian-held and controlled and its downstream investments are also considered as Indian. For instance, if the holding company is Indian-owned and controlled with 51% equity, foreign investments, which are made in any downstream ventures by this holding firm is also seen as Indian, without attracting any sectoral FDI caps. This change in the FDI norms has facilitated FDI investments in the country.
Until now, even though DIPP defined foreign and Indian ownerships, it remained silent on the nature of 50:50 JVs and treatment of their downstream investments. Last week, the department of economic affairs in the finance ministry asked DIPP to clarify the treatment of investments made by 50:50 JVs at the earliest so that the confusion doesn?t become a hindrance for such JVs investing in India. It is learnt that DIPP will now classify such investments as foreign and bill such companies as foreign-owned and controlled, a government official involved with the policy said.
The official also said the clarification would be incorporated in the FDI policy defined under Press Notes 2 and 3 of 2009. The issue came up when the foreign investment promotion Board (FIPB) considered Oman Refinery?s proposal to increase its stake in the JV with Bharat Petroleum to 50%. The Board held up the proposal owing to lack of clarity on the issue and asked DIPP to clear the air.
Prior to Press Note 2, 2009, companies set up under 50:50 JVs were treated as Indian. However, with the new clarification by DIPP, these would now be counted as foreign companies.