Easier FDI rules for Indian arms of foreign firms

Written by Rajat Guha | Rajat Guha | New Delhi | Updated: Jan 27 2010, 05:51am hrs
The government has decided to allow Indian arms of foreign firms to use internal accruals for reinvestment in downstream sectors, provided they are reckoned as debt and comply with relevant external commercial borrowing (ECB) norms. The new regime would let these firms, owned or controlled by foreign companies, to bring in additional capital without breaching the foreign direct investment (FDI) caps, as the reinvested funds are not treated as equity capital, official sources told FE.

The move would greatly ease the cash flow of foreign companies present in India and enable them to compete with local firms on a level-playing field.

Currently, FDI caps in key sectors impede the downstream investment plans of companies incorporated in India as wholly owned or majority-owned by foreign firms. Downstream investment refers to either fresh investment or acquisition by foreign-owned Indian holding company in a project of different activity which may or may not belong to the same group.

The department of industrial policy and promotion (DIPP) would soon make necessary amendments to the Press Note 4 of 2009, which stipulates downstream investment policy, the sources said.

If such investments are classified as debt, revenue generated from Indian operations of foreign firms in sectors like telecom, aviation and defence, where FDI is capped, could be used to a greater extent for downstream investments, the sources added. However, such re-investment of the internal accruals has to be done through redeemable or compulsory convertible preference shares. Officials said the rider was to ensure that the money brought in through this route was not treated as capital and complied with the relevant ECB guidelines.

However, some experts feel treating reinvestment of revenue from Indian operations as overseas debt might not stand the scrutiny of international norms.

The matter of downstream investments by Indian subsidiary of foreign companies came up when the FIPB at its last meeting took up the proposal of Intelenet, an IT company, which sought to invest in its Indian subsidiary from internal accruals through compulsory convertible preference shares. While approving the proposal, FIPB requested the DIPP to clarify the policy position in this regard.

Intelenet had written to the FIPB: As the preference shares are redeemable and do not have a conversion option, the prior approval of FIPB is not required to subscribe to the preference shares or to redeem the same. The proposed investment by Intelenet in the preference shares issued by the company would fall outside the purview of downstream investments by foreign owned or controlled operating-cum-investing companies as contemplated in Press Notes 2 and 4 of 2009 issued by the ministry of commerce and industry and hence the requirements thereof will not apply to such proposed investment.