Foreign investors will soon be able to pump in more money into sub-holding arms of Indian companies without breaching the existing sectoral limits, directly or indirectly. This will be possible because the government now has a new formula to calculate foreign direct investment.
Using the formula, FDI in sub-group or downstream companies will now be linked to the stakes of foreign investors in holding or upstream firms.
For example, if an overseas entity has 50% stake in a holding company in India and 20% in its arm or in a sub-holding company, FDI in the sub-holding company will then be counted as just 10% (50% of the 20%), against the current practice of 20%. But the existing sector-specific FDI caps will remain.
The government feels the fresh approach will give more leeway to foreign investors while ensuring that they do not cross the sectoral FDI limits. It will also bring about greater transparency in foreign entities? disclosure of stakes in downstream companies. The new method will make the calculation of FDI limits more clear. Officials said some companies use circuitous routes to bring in FDI and circumvent regulatory restrictions. The new approach would weed out such sham shareholdings in sectors like media, aviation, petroleum and commodity exchanges.
Since there is little opportunity to raise the sectoral caps in the current political climate, the new arithmetic is a win-win situation for both the government and industry. In many sectors, domestic partners want their foreign counterparts to bring in fresh investment. But the sectoral caps have prevented this.
At present, there is no uniform method for calculating FDI in sub-holding companies as various ministries are using their own methods. ?Even within the present sectoral caps, the new method will substantially increase the possibility of FDI,? one official said. The new formula would put in place a consistent methodology for all sectors except ?insurance?, officials privy to the development told FE.
Insurance is expected to be kept out of the ambit of the proposed norms as the government has evolved a consisent FDI policy for the sector. Also given the current political temperature, any proposal to push in more foreign investment could create political opposition to the entire policy. ?The Irda (Insurance Regulatory Development Authority) policy on foreign investment appears consistent. As such, it does not appear necessary to bring insurance under revised FDI guidelines,? the official said.
The formula has been finalised by the department of industrial policy and promotion in consultation with the department of economic affairs under the finance ministry. It has been circulated among various ministries, along with a comprehensive note on reviewing the present FDI regime.
?The idea is definitely one step ahead of the existing regime but it would require uniform implementation across all sectors,? said PricewaterHouseCoopers executive director Sanjay Hedge. Latest government data show FDI inflows during January-June 2007 increased to $11.4 billion from $ 3.6 billion during the same period in 2006.