In a bid to attract more foreign capital and skirt the contentious ceilings in sector, the Indian government eased the Foreign Direct Investment (FDI) norms on Wednesday. Under the revised guidelines, capital investments into downstream companies that are ‘owned and controlled’ by Indians will now be counted as domestic investments and discounted while calculating indirect foreign investments. In other words, if a foreign investor has bought a stake in a copy upto the permitted ceiling, then he can take a position in Indian companies that have a stake in the target company.
Analysts see this as a deft move in an election year to avoid potential confrontation with the opposition on FDI ceilings in sensitive sectors such as retail and finance. The new rules will apply to sectors that have investment ceilings.
The norms were proposed by the Department of Industrial Policy and Promotion (DIPP). “The objective of these new guidelines is to make FDI norms simple and transparent,”
“For all investments directly by a non-resident entity into an Indian company will be considered as foreign investment and foreign investments thru investing Indian company will now be used for the calculation of the indirect foreign investment in case the Indian companies is owned and controlled by resident Indian citizens. The definition of the word owned and the word controlled will be included in the guideline,” Chidambaram added while announcing the simplified rules for calculation of direct and indirect foreign investment.
However, investments into an Indian company that is foreign-owned and controlled will be considered indirect FDI. The guidelines also mandate government and foreign investment promotion board (FIPB) approval for “transfer of ownership and control of Indian companies” to overseas firms and individuals.
The move which was approved by Cabinet Committee on Economic Affairs (CCEA) on February 11, 2009, could open FDI into a host of sectors where it was previously restricted including retail, telecom, aviation and media. Norms for foreign investment into Indian companies has been gradually liberalized since 1991. The pace of this liberalization, however, has been different for different sectors.
