Wednesday?s relaxation in the foreign direct investment (FDI) norms has opened the field for large-scale restructuring of company finances in several sectors and made companies subject to additional dividend distribution tax of 15%, including surcharges.
This means there would be lower return on investment for the investing company. The new rules say the company through which the money is routed will also have to be based in India. ?The double taxation is unavoidable in these cases as the investing company would have to be incorporated in India if the indirect foreign equity has to be counted as domestic,? Diljeet Titus, senior partner, Titus & Company, said.
The government is expected to come out with clarifications on several issues soon and the subject of dividend distribution tax could also figure in them.
But analysts agreed that despite the tax, India has now moved to a regime where sectoral caps have become meaningless. Now, say, in telecom, despite the 74% cap, foreign investment can go up to as high as 98%. For the record, however, commerce & industry minister Kamal Nath sought to allay such fears of circumvention largely after protests from the Left parties about backdoor entry. Nath said the new guidelines were not meant for a backdoor entry for foreign firms into sectors with FDI restrictions, and caps for certain sectors will continue to be in force. He said the government would look into any misuse of the latest norms.
The move will also lead to several restructuring by Indian companies having FDI and the ones looking at foreign investment, since creation of holding companies will help in raising FDI. The government strategy in bringing about this relaxation without tinkering with the sectoral caps is being seen as a masterstroke by analysts, as removing the cap, say, in a sector like telecom, would otherwise have attracted immense political opposition on security grounds.
The government has reasons to change the norms. Total FDI during April-November was only $19.7 billion. While this is 78% more than $11.1 billion received during the same period last fiscal, most of it came before the downturn. FDI inflows fell to $1.4 billion in October and to just $1 billion in November. The commerce ministry estimates the country would attract only $30 billion as FDI against the target of $35 billion this year. In 2006-07, India had received FDI worth $15.5 billion, while in 2007-08, the country got $24.5 billion.
The changed norms would facilitate FDI in sectors like multi-brand retail where FDI is not allowed. This can happen by floating holding companies, which can have an FDI component but are Indian-owned and controlled. If these holding companies invest in a retail venture that does not have any FDI component, FDI would come into play indirectly. The holding company does not require an FIPB approval as the equity in it will now be deemed as domestic.
According to BS Nagesh, managing director, Shoppers Stop Ltd, ?If one goes by the government announcement that equity investments routed through companies in which majority ownership and control are in the hands of Indians would be treated as fully domestic equity, then I feel that opportunities for retail will open up in multi-brand retailing?.
Nath said FDI the ceilings on sectors and the ban on FDI will remain. ?There is no change in sectoral limits. That position doesn?t change. We are not talking of misuse or abuse. If there is any misuse or abuse we look at it,.Nath said.
