Govt mulls new guidelines to define overseas investments

Move to make investing in sectors with FDI cap easier.

The government is working on new guidelines on what constitutes direct and indirect investment from overseas. The move is expected to ease procedural hassles for Indian companies, with foreign shareholding, to invest in other domestic firms belonging to sectors where foreign direct investment (FDI) is capped at various levels.

Sources said a draft note for the Cabinet prepared by the Department of Industrial Policy and Promotion (DIPP) also defines an Indian company in the context of overseas investments.

According to the proposed guidelines, if a company based in India declares that a foreign firm has a “beneficial interest” in it, any investment made by the Indian company in another domestic firm will be considered as FDI.
 

SECTORAL FDI CAPS
FDI cap	Sectors
20%	FM Radio*
26%	Uplinking of current affairs and news channels*, defence, insurance, newspapers and current affairs periodicals
49%	Credit Information Companies*, commodity exchanges*, scheduled air transport service/domestic passenger airline, asset reconstruction companies, cable network*, hardware facilities like up-linking*, investing companies in infrastructure sector (except telecom)
51%	Single brand retail
74%	Telecom*, ISP with gateways, radio paging, end-to-end bandwidth, satellite services
* Composite cap (FDI + FII) Source: Department of Industrial Policy and Promotion

According to the latest World Investment Report released by the United Nations Conference on Trade and Development last week, India had 500 companies having foreign participation at different levels in 2005. These foreign affiliates are in the form of subsidiaries, associates or branches.

The proposed guidelines also say that foreign investment from companies will be counted towards the sectoral cap which is either for FDI or a combination of FDI and foreign institutional investment (composite cap).

But the indirect foreign investment through the investing Indian company will not be taken into account under certain conditions. For this purpose, the DIPP has formulated the definition of what constitutes an Indian company in the context of foreign investment.

The proposal says that a firm, which is “owned” by Indian residents with a 50 per cent stake as well as “controlled” by Indians through the power to appoint directors and legally direct their actions, will be termed an “Indian company”. Moreover, the Indian residents will need to have beneficial interest in the firm which they own.

Indirect investment through such investing “Indian companies” will not be considered for calculation of the indirect foreign investment.

Indirect investment from firms not fulfilling the criteria for an “Indian company” will be counted as entire investment into the target company.

If the DIPP proposals get approved, then an Indian company with some foreign stake will be able to invest more in sectors which have sectoral FDI caps like telecom.

“Currently, there is lot of confusion on what is direct foreign investment and what is not. The government needs to explain this through policy directives,” said Vivek Mehra, partner, PricewaterhouseCoopers.