In a policy reversal, the finance ministry has decided to shut the route that allowed firms with up to 49% FDI to make downstream investments in sectors where FDI is prohibited, like multi-brand retail, agriculture, lottery and atomic energy. This is despite such firms being treated as ?domestic companies? and their downstream investments as ?domestic investment? in last year?s controversial norms for FDI .
The finance ministry has asked the department of industrial policy and promotion (DIPP), the nodal FDI policy making body, to issue a clarification, a senior official told FE. The change would be subsumed in the new consolidated FDI policy.
With the clarification, the finance ministry wants to discourage such Indian companies (in terms of ownership and control) from applying for investing in a sector where FDI is disallowed. Many such pleas have come up before the Foreign Investment Promotion Board, but the board has been indecisive on them.
Analysts reckon that the finance ministry?s decision might also have been prompted by the reduced dependence of Indian corporate groups on foreign capital for their new ventures, given the economic recovery. The ministry feels that given the changed scenario, allowing FDI through the backdoor in these sensitive sectors could be a risk that outweighs the benefit of any additional investment it could lead to.
The controversy kicked off by Press Notes 2 and 3 on computing foreign investment has persuaded the government to make fresh amendments to the norms.
Under PN 2 and 3 of 2009, if a company is owned and controlled by Indians, any foreign investment in it would not come in the way of it making investment in sectors where foreign investment is proscribed. Under PN 2 and 3, if foreign holding in a company is less than 50%, it will be deemed as Indian-owned. If it has majority Indian directors on its board, it will be considered as controlled by Indians. So, even if foreign holding in a company is up to 49%, its investment in another downstream subsidiary will be termed as domestic investment. The company will be treated as an Indian company and can invest in sectors like multi-brand retail and agriculture, which have not been thrown open to FDI. The finance ministry has clarified that sectors such as multi-brand retail, especially food and grocery retail, and agriculture would remain out of the ambit of FDI. ?Allowing FDI in this sector even indirectly would mean unsettling the large vote bank that comprises a major chunk of mom & pop retailers. In its tenure, the UPA government has always drawn flak whenever it tried to open the FDI window in multi-brand retail or agricultural area,? the official said. The new guidelines for calculation of FDI are applicable in sectors having FDI caps such as telecom, information and broadcasting, print media, defence and single-brand retail. The guidelines have also made sectoral caps ineffectual.