New norms to prevent backdoor entry of FDI into restricted sectors

Written by fe Bureau | New Delhi | Updated: Mar 1 2009, 05:28am hrs
The government has issued new guidelines to ensure that foreign investors neither gain backdoor entry into prohibited sectors like multi-brand retail and atomic energy, nor indirectly cross the ceilings in sectors including defence and media.

The new norms on foreign investment issued on Thursday also guarantees transparency in downstream investment made by companies. Downstream investment means indirect foreign investment by an Indian company into another company by way of subscription or acquisition.

The clarificatory guidelines on downstream investment by Indian companies through the Press Note 4 of 2009 are meant to bring in more foreign investment into the country, but at the same time curb strategic investments that aim to grab control in sectors with foreign investment restrictions or prohibition.

The new norms for the first time, defined operating company and investing company.

While operating company is defined as an Indian company which is undertaking operations in various economic activities and sectors, investing company is defined as a company holding only investments in another company, directly or indirectly, other than for trading of such holdings/securities.

According to the guidelines, in operating companies and operating-cum-investing companies, foreign investment would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps with regard to the sectors in which such companies are operating. The government has also specified an investing company will have to take prior approval from Foreign Investment Promotion Board (FIPB) for making any downstream investment.

It added that within 30 days of making the downstream investment, the investing company would have to inform the FIPB about the same. Currently companies receiving such investment, or the recipient companies, will have to report to the FIPB about the foreign investment received by them.

Press Note 4 of 2009 lends clarity on who needs to take approval from FIPB. There is also clarity on the meaning of an investing company, operating company and downstream investment, said Pallavi Joshi Bakhru, partner, Grant Thornton. However, Ravi Shingari, associate director, KPMG said investors expect more clarifications as doubts still remain on certain important points. The doubts that the Press Note 2 of 2009 created on beneficial ownership still remain. Besides, regarding the level of ownership criteria, it is not clear if we should stop at the immediate shareholding or if we should go to the ultimate shareholding level, he said.

Commerce and industry minister Kamal Nath said, These guidelines have been framed specially to see that ownership or control does not pass from Indian citizens to non-residents in sensitive sectors with caps without prior government approval. This safeguard is being introduced for the first time in our foreign investment policy. He had also assured that it would look into any misuse of the latest norms when brought to its notice.