After telecom, ports and refineries, foreign direct investment (FDI) in more sectors could now be put under security scrutiny. The government is planning to slap new entry route restrictions on FDI in the mining and realty sectors from a security standpoint, sources told FE.
So all FDI proposals in mining would now have to be vetted by the Foreign Investment Promotion Board (FIPB). Similarly, restrictions will also be put for foreign investments in the realty sector as the government is worried about circuitous flow of unaccounted funds into the sector through the FDI route. There are reports that FDI norms related to minimum capitalisation and minimum area are being violated by players in the construction industry.
At present, up to 100% FDI is allowed in realty projects through the automatic route with certain conditions like a three-year lock-in on investments and minimum capitalisation of $5 million. In mining, the government allows 100% FDI through the automatic route. Under the automatioc route, companies are allowed to bring in FDI into the country just by informing the Reserve Bank of India.
The changes in FDI regulations are being considered in the wake of security concerns raised by the NSC.
The National Security Council secretariat has already issued a note highlighting the need for security scrutiny of these sensitive sectors to all the stakeholders in the government, said a government official privy to the development.
The move comes at a time when government has committed itself to liberalise the FDI regime, allowing a larger spectrum of sectors under the automatic route. In fact, for the mining sector the proposed changes would be a reversal of the investor-friendly regime that the government intends to put in place through the 2008 national mineral policy. Several mining giants including the world’s biggest ? Rio Tinto, BHP Billiton and Vale ? and others are waiting in the wings to increase investments in the country after institution of a liberal policy regime.
Apart from flow of unaccounted money into the sector, the concern in the real estate sector is also on account of diversion of funds meant for FDI-approved projects into other projects that are not FDI-approved, including investments in agricultural land, which is a complete no-go area for FDI.
In mining, the concern is that control of national resources should not go into the hands of overseas entities without proper scrutiny as it could be exploited against national interests. The thinking goes against the provisions in the new mining Bill, which has suggested a host of measures to give a boost to FDI inflows into the sector. The Bill is currently being examined by a group of ministers, after which it is intended to be put up for Parliamentary approval. Till date, the mining and realty sector have got R3,400 crore and R42,000 crore of FDI, respectively.
?The proposal, if implemented, could further dampen investment climate in the country that has received only paltry FDI flows so far. It could also impact mining of deep-seated minerals such as gold, diamond, lead, as technology in this area lies only with large multinational corporations,? said Federation of Indian Mineral Industries secretary general RK Sharma.
The NSC secretariat under the Prime Minister?s Office had earlier proposed to shift all sensitive sectors to the approval route, which implies prior FIPB nod. The department of industrial policy and promotion has, however, said that no policy change is required in other sectors where FDI is capped, namely telecom, defence or single-brand retail, as foreign investments in these sectors are anyway subjected to government clearance.
?Mining and real estate are very sensitive topics. Bringing FDI in mining industry under the approval route will be a retrograde step. I think the government should look at regulating the mining industry and the real estate sector in a more efficacious and judicious manner,? said Upendra Sharma, partner, J Sagar Associates. The NSC has also demanded from the department of industrial policy and planning a system of post-establishment surveillance, by strengthening information gathering mechanisms, especially at the state and district levels.
The RBI wants real estate removed from the list of sectors where FDI can come in through the automatic route. Since real estate companies are not allowed to raise external debt, there are reports of them using instruments like compulsory convertible debentures and offshore special purpose vehicles for borrowing abroad and then funnelling the funds to the parent in India as FDI.
