RBI unhappy over govt move to ease investment norms

The Reserve Bank of India (RBI) has raised concern over the government’s proposal to allow investments by foreign-owned Indian holding companies in downstream projects under the automatic route even if the foreign investment in the particular sector is capped or is under approval route.

Sources explained that this forms part of the overall amendment to Press note 9 of 1999, which deals with policies on investments by foreign-owned Indian holding companies in other subsidiaries of other Indian companies or of the same company.

Downstream investment refers to either fresh investment or acquisition by foreign-owned Indian holding company in a project of different activity which may or may not belong to the same group.

While the government wants to free all such investments from any prior permission or approvals (under automatic route) since the holding company is an Indian company, albeit foreign owned, the RBI feels such relaxation should be accorded only in sectors that are already under the automatic route or up to a certain limit of investment which is under the automatic route in a particular sector.

Or else, the move could dilute the objective of having sectoral caps and approval system because a wholly-owned Indian subsidiary of foreign company does not mean it is an Indian company, said sources close to the development.

Currently all such investments need to be approved by the Foreign Investment Promotion Board (FIPB) since there is an ongoing debate in the government over the definition of indirect foreign holding.

To be specific, according to RBI, such relaxation could be extended to all activities under annexure III of industrial policy but only up to a limit which does not require prior approval of either the FIPB or the RBI. For example, if ABC is a holding company with foreign ownership and proposes to make investment in the banking sector then it could invest up to 74 per cent under automatic route. However, if the downstream investment is an asset reconstruction company, then foreign direct investment (FDI) would require prior approval of FIPB.

The government feels the ABC’s investment in asset reconstruction company should be under the automatic route since the holding company is an Indian entity.

Foreign investment under the automatic route does not require any prior permission either from the RBI or the FIPB unlike investments for approval route.

According to the central bank, this could otherwise discriminate investments by the foreign-owned Indian company against other foreign companies who are investing in such companies as a first-step investment in India.

The RBI also feels that the guidelines for foreign ownership of the Indian company also is under review. Therefore, the views on such downstream investments are meaningless till the method of calculation for foreign ownership is clear.

Taking a firm stand on indirect foreign investment, the finance ministry has said that all interests of foreign entities — control, economic benefits and shareholding — be included in calculating the effective foreign holding in a company. Indirect foreign holding is the interest of a foreign company in an Indian company through another Indian entity.

The Department of Industrial Policy and Promotion (DIPP), under the commerce ministry, on the other hand, follows a two-pronged method for calculating indirect foreign holding in an Indian entity.

Under this, the foreign company should at least have 50 per cent plus one share in an Indian company, which in turn should have at least 10 per cent stake in another Indian company in which the indirect foreign holding is sought to be calculated.