As part of its effort to rejuvenate moribund capital inflows, the government on Wednesday rationalised indirect FDI norms for sectors that have caps. The move would enable foreign entities to hold higher stakes in joint ventures with firms owned and controlled by Indians that may also have an FDI component.
Under the new norms approved by the Cabinet committee on economic affairs, direct investments by NRIs would now be considered FDI, while funds routed through an entity owned or controlled by a resident Indian or an Indian company would be considered domestic investment. The department of industrial policy & promotion will shortly release the definitions of ?ownership? and ?control?.
Basically, what this means is that any FDI in the equity structure of an Indian partner would no longer be considered indirectly in a joint venture, thereby giving the foreign partner scope to raise its stake up to the sectoral FDI cap. Previously, FDI in an Indian partner would have been indirectly included when calculating the overall FDI component of a joint venture.
Home minister P Chidambaram told reporters that the new guidelines would simplify, streamline and rationalise the methodology of calculating indirect foreign investment across sectors leading to investor-friendly, credible and predictable regulations. The decision was taken based on the recommendations of a group of ministers, headed by external affairs minister Pranab Mukherjee.
?This is a welcome step. There is clarity in policy to compute the percentage of FDI in sectors with an FDI cap. Sectors like telecom, aviation, retail, insurance and defence can significantly benefit from this initiative,? said Akash Gupt, executive director, PricewaterhouseCoopers.
In sectors with existing ceilings, Foreign Investment Promotion Board approval would still be required in all cases where an Indian company is being set up with foreign investment and the company is owned or controlled by a foreign firm.
FIPB approval would also be needed if there were a change in ownership or control of an existing Indian company from resident Indian citizens or Indian company to a foreign entity due to a transfer of shares, amalgamation or mergers and acquisitions. Furthermore, investment by non-resident entities would be deemed indirect foreign investment and considered in the cap.
Besides, if the investing company is a wholly owned subsidiary of an operating-cum-investing or investing company, the indirect foreign investment would be limited to the foreign investment in the investing company. ?There could be some clever structures in sectors with a cap. But it is unlikely that foreign firms will take a high risk by investing in sectors where FDI is banned,? said Gaurav Karnik, associate director, Ernst & Young.