FDI in micro, small units subject to sectoral caps: Press Note

The government today came out with a new Press Note stipulating that foreign direct investment in micro and small enterprises (MSE) will be governed by sectoral caps and other regulations instead of the earlier 24 per cent ceiling on the foreign equity holding.     

The new Press Note 6 follows enactment of the Micro, Small and Medium Enterprises Development Act, 2006, which removed ceiling for equity participation, both domestic and foreign, in these units.     

The Act defined micro and small enterprises solely on the basis of investment in plant and machinery for units engaged in manufacturing and equipment for those engaged in services.     

"Thus, the present policy on FDI in MSE permits FDI subject only to the sectoral equity caps, entry routes and other relevant regulations," the Press Note issued by Department of Industrial Policy and Promotion (DIPP) said.    

Earlier, press note 18 of 1997 had stipulated that for foreign collaboration, maximum equity participation for small scale units was 24 per cent. As such, proposals for inducting foreign equity of more than 24 per cent was subject to the condition that the company would get itself de-registered as small-scale unit. The Press Note 18 stands modified by Press Note 6, which allows FDI in MSE as per sectoral equity caps and other sectoral regulations.     

There are about 2.61 crore units in the MSME sector employing 5.97 crore people.

The new press note further says that any foreign investment of more than 24 per cent in a non-MSE industrial unit, which is manufacturing items reserved for MSEs, would require prior approval of the Foreign Investment Promotion Board.     

The non-MSE units engaged in production of the 21 reserved items, including bread, pickles and aluminium utensils reserved for MSEs are required to export at least 50 per cent of additional production within a maximum period of three years.     

According to the 2006 Act, in manufacturing sector micro units are those where investment in plant and machinery does not exceed Rs 25 lakh, while small enterprises are defined as those investing between Rs 25 lakh and Rs five crore.     

In services sector, the investment in equipment up to Rs 10 lakh is defined as micro enterprises and Rs 10 lakh to Rs two crore as small units.     

The new Press Note is sixth in a series in 2009. Some of the earlier press notes like 2,3 and 4 had raised a controversy relating to the manner of calculating foreign direct investment and downstream investment in subsidiaries.