FDI policy simplified and rationalised

Delhi, Apr 1: Foreign Direct Investment (FDI) in India over the 11 month period ranging from April 2010 to February 2011 has been poor. FDI inflows declined by 25% year-on-year (yoy) to US $8.3 bn. For the month of January and February in 2011, FDI fell by 49% and 30% respectively, on a yoy basis. The government of India came out with the changes for foreign direct investment under its third, six-monthly update covering a host of issues.

The important changes were:

Foreign partners of a Joint Venture can open their wholly owned subsidiary at will.
If foreign companies were to set up their wholly owned subsidiary in India then FDI policy required that they get a no-objection certificate from their Indian partners.

This regulation has been used by some Indian companies in the past. VK Modi group and its US partners Guardian over the latter's attempt to set up its own wholly owned subsidiary, outside the existing JV.

Wadia group had invoked this clause against the French company, Groupe Danone.

Department of Industrial Policy and Promotion secretary said, "The original policy was formulated when the country was in protectionist mode, and followed for rent seeking."

In its press release on the occasion the government stated, "It is expected that this measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country".

Issuing equity for imported capital goods and machinery
The Government will now permit issue of equity, although after an approval from Foreign Investment Promotion Board (FIPB), in exchange of import of capital goods, machinery and equipment.

Greater flexibility in pricing of convertible instrument
Now, "price / conversion formula" should be determined upfront. Therefore, companies will now have the option of prescribing a conversion formula. This is subject to the condition that, price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the prevailing valuation norms Discounted Cash Flow (DCF) method of valuation for the unlisted companies.

FII Investment
The policy till 2010 was "A Foreign Institutional Investor (FII) may invest in the capital of an Indian company either under the FDI Scheme/Policy or the Portfolio Investment Scheme. 10% individual limit and 24% aggregate limit for FII investment would still be applicable even when FIIs invest under the FDI scheme/policy."

It has now been clarified that aggregate FII limit of 24% can be increased to sectoral cap or a statutory ceiling by Board of Directors resolution followed by special resolution in shareholders meeting.

FDI in NBFCs
It has now been specifically clarified in Clause 5.2.18 that automatic route is available only for prescribed 18 Non-Banking Financial Company (NBFC) activities. Foreign Investment Promotion Board (FIPB) approval is required for any other NBFC activity (other than the 18 specified activities).

Change in classification
The earlier categorisation of 'investing companies', 'operating companies' and 'investing-cum-operating companies' has been done away with.

Rather the companies are now being classified into only two categories - 'companies owned or controlled by foreign investors' and 'companies owned and controlled by Indian residents'.

Agriculture sector
The government has also loosened up the agriculture segment of the economy. It will allow 100% FDI in the development and production of seeds and planting material etc under controlled conditions. Animal husbandry, aquaculture etc, too, should be developed under controlled conditions. Services related to agro and allied sectors have also been allowed 100% FDI. The tea sector, too, will be a beneficiary of 100% FDI.

On the occasion Anand Sharma, Commerce and Industry Minister stated: "Circular 1 of 2011 third edition of the Consolidated FDI Policy, is a part of the ongoing efforts of 'procedure simplification and FDI rationalisation,' which will go a long way in inspiring investor confidence."

The direction of these changes are right. FDI has been made simpler and rational.

OneIndia News