Links investment limits to control.
Retail, telecom, media and a host of sectors in which foreign direct investment (FDI) is restricted stand to gain from changes in FDI policy that the Cabinet Committee on Economic Affairs (CCEA) cleared today linking approvals to the concept of control for the first time.
The new norms were proposed by the Department of Industrial Policy and Promotion (DIPP) and discussed by a Group of Ministers on February 3.
“The objective of these new guidelines is to make FDI norms simple and transparent according to DIPP,” Home Minister P Chidambaram told reporters today when he announced the new measures.
The new measures will be implemented with prospective effect. Government sources said two Press Notes — policy documents governing FDI norms — of the 2009 series will be released in the next 10 days.
Under the new guidelines, downstream investments by an Indian company that has foreign investment but is “owned and controlled” by Indians will not be considered FDI (see graphic).
“Owned” in this context will mean having a more than 50 per cent shareholding and beneficial ownership. "Controlled" means that the owners will have the power to appoint the majority of board directors and legally direct the board’s actions.
“This means there is a huge opportunity for Indian-owned and -controlled companies to bring in FDI and then undertake downstream investments, without bothering about sectoral limits or restrictions,” said a senior government official.
However, if the investing Indian company is foreign-owned and controlled, then its entire downstream investments will be considered indirect FDI.
But there is an exception. If the foreign-owned and controlled Indian company undertakes downstream investments in 100 per cent owned subsidiaries, the amount of indirect FDI will be equal to the percentage of foreign investment in the Indian company.
“Although the proposed policy puts to rest the debate on computing FDI in sectors in which limits apply, it also implicitly allows FDI (without control) in all sectors and industries through downstream route. For instance, FDI is currently prohibited in multi-brand retail, real estate trading, gambling, agriculture etc. If these sectors are not excluded from the proposed policy liberalisation, this is definitely a leap,” said Akash Gupt, executive director, PricewaterhouseCoopers. Some Indian-owned companies in sectors like telecom may get more room to bring in additional investment, said analysts.
But insurance, in which the government is proposing to increase FDI to 49 per cent from 26 per cent, will be kept out as it is governed by an Act of Parliament, the official said.
Retail, in which FDI is only allowed in single-brand and wholesale cash and carry business, is likely to benefit to a great extent because of the new guidelines. Many foreign players currently operate through the franchisees. “If foreign investments can be routed through Indian-owned and -controlled companies, overseas retailers will definitely like to be a part of this,” said a Dehi based analyst.
Businessmen in sectors like real estate, however, are not upbeat about the new FDI rules. “First, the foreign investor may not be enthusiastic about a minority interest where he cannot have control in the joint venture company or over the project for which the investment ultimately flows in,” Sanjay Verma, executive MD, South Asia of international real estate consultancy Cushman & Wakefield.
But, he added that from realtors’ perspective, the change in FDI policy will help them tap foreign investments in sectors in which FDI is not currently permitted. For instance, small projects that are less 50,000 sq metres or projects that are completed are not eligible to attract FDI today.
The new guidelines have also made government approval mandatory for transfer of ownership and control of Indian companies to overseas firms and individuals. This was done after concerns were expressed in various quarters of government on ownership of companies being transferred in sensitive sectors like telecommunications and defence to foreign entities.
For example, FDI up to 49 per cent is automatic in sectors like telecom, which has an overall limit of 74 per cent. “This moves ensures uniform norms for all sectors with an FDI cap,” the official said. Companies will also have to furnish ownership details in Indian companies. In addition, inter-se agreements, which refers to agreements amongst shareholders on appointment of board of directors, voting rights or creation of voting rights disproportionate to shareholding, will have to be furnished while applying for FDI.