Update Fema for Press Notes 2&4, government tells RBI

Ends ambiguities in Feb guidelines relaxing sectoral limits in FDI rules.

The government has sought to put an end to the ambiguities in the implementation of Press Notes 2 and 4, which significantly relaxed foreign direct investment guidelines, with the commerce ministry requesting the Reserve Bank of India (RBI) to make changes in the Foreign Exchange Management Act (Fema) to operationalise the guidelines.

The direction from the government follows a number of references and queries from investors, who have pointed out that the changes have not been incorporated in the Fema or notified in the annual master circular on foreign direct investment (FDI) issued by the RBI.

The significance of the circular, issued earlier this week, is that it sets at rest RBI's opposition to the Press Notes, which were issued in February, on grounds that they would encourage investors to breach sectoral FDI limits.

The ministry has also requested the RBI to incorporate the changes in Fema following Press Note 6, which was issued last week, which made changes in FDI rules for the small scale and micro scale industrial undertakings. Under the new note, the 24 per cent ceiling on FDI for small scale sector is being replaced by sectoral caps imposed on various sectors.

Press Notes 2 and 4 state that FDI routed through an Indian company owned and controlled by resident Indians will not be taken into account while calculating sectoral limits. An Indian-owned company is defined as one in which resident Indians or Indian companies have more than a 50 per cent beneficial stake. Control has been defined as the power to appoint the majority of directors.

The guidelines also include rules for transfer of ownership or control of Indian companies in sectors with FDI limits from resident Indian citizens to non- resident Indian citizens.

In a sharp divergence from its initial opposition to Press Notes 2 and 4, even the finance ministry recently made it clear that it is not planning to recommend further changes to the guidelines. The statement comes a few months after the department of economic affairs (DEA) in the finance ministry had raised objections to the new guidelines, saying they rendered sectoral FDI limits meaningless.

North Block's decision not to alter the Press Notes eases the way for the complex $23 billion share swap deal between Bharti, India's largest telecom company, and South Africa's MTN, one of the first major test cases of the new policy guidelines.