Amendment in PNs to change FDI rules

Written by Rajat Guha | Rajat Guha | New Delhi | Updated: Jun 28 2010, 06:16am hrs
The government is all set to make key changes in the foreign direct investment (FDI) rules by amending press notes (PNs) 2,3 and 4 that were issued in 2009. Downstream investments by Indian private banks, including HDFC and ICICI among others, will continue to be treated as foreign despite a long-standing demand from banks and RBI for exempting them from the purview of PNs.

But, the department of industrial policy and promotion (DIPP)the FDI policy-making bodyhas agreed to keep some banking activities such as debt restructuring, strategic investments and other para-banking activities outside the purview of PNs.

The decision was taken by a high-level group of officials from department of economic affairs ( DEA), DIPP and RBI set up by finance secretary Ashok Chawla to bring about suitable changes in FDI rules. In a recent letter to DIPP secretary RP Singh, Chawla has directed the department to expediously make suitable amendments in the FDI policy and issue all necessary clarifications by September.

Investments into prohibited sectors like multi-brand retail, agriculture, lottery, nidhi companies, tobacco and atomic energy wont be allowed if they have even a miniscule foreign ownership.

Earlier, the PNs had left a grey area for companies having foreign ownership. For instance, an Indian firm with 49% foreign holding could invest in restricted sectors. According to PN 2 and 3, a company is deemed Indian if it has foreign stake less than 50% and vice-versa. Now, an Indian firm is very tightly defined as one with no foreign stake for investments in FDI prohibited sectors.

Also, in order to invest in sectors with capsdefence, telecom, aviation among otherscompanies making downstream investments would have to disclose shareholding to a special oversight committee, to be set up under the finance ministry. The oversight committee will check the corporate structure of the company and thereby deem it and its downstream investments as Indian or foreign.

Chawla has also asked for framing composite caps for various forms of foreign investments in sectors with FDI limits. There will not be separate caps for FDI and FII and instead all forms of investments, including FDI, FII, venture capital, would be subsumed within a single FDI cap. For example, in the telecom sector, all forms of foreign investment would be under the single cap of 74%. The current practice of having different thresholds for different investments like FDI and FII would be done away with. However, the government will grant special exemption to FIIs by freeing them from adhering to various entry-route restrictions and conditions. These restrictions include minimum capitalisation, lock-in period and minimum area requirements among others. Chawla has deliberated that all these changes, which are to be made in the FDI policy, will apply prospectively. Investments made by Indian companies in the past will not be disturbed.