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Rules eased for foreign partners

Rules eased for foreign partners
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First Published: Fri, Apr 01 2011. 08 38 AM IST
Updated: Fri, Apr 01 2011. 08 38 AM IST
New Delhi: The government on Thursday scrapped the requirement that foreign companies need to obtain the approval of their existing Indian joint venture partners for further collaborations or solo ventures in the same field.
“It is expected this new measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI (foreign direct investment) and technology inflows into the country,” the department of industrial policy and promotion (DIPP) said in a statement.
Akash Gupt, executive director at PricewaterhouseCoopers, said the old policy had lost its relevance and the abolition was long overdue. “It was discouraging foreign investors to set up joint ventures in India,” he added.
The government had formulated the policy in 1998 when Indian companies complained of being dictated to by foreign partners.
However, foreign companies complained that Indian partners were using the provision for rent-seeking.
In 2005, the government did away with the requirement of the provision for joint ventures formulated after the date.
However, the requirement was still necessary for foreign companies that formed joint ventures before 2005.
With the latest notification, DIPP has abolished the provision altogether.
DIPP secretary R.P. Singh said between 1999 and 2005, out of 316 such cases that were referred to the Foreign Investment Promotion Board (FIPB), only two cases were rejected and the rest were given approval to form new joint ventures without the consent of their earlier Indian partners.
“It was unnecessary. It was neither feasible nor practical,” Singh added.
DIPP, which carried out its half-yearly revision of FDI policy and unveiled the consolidated policy document on Thursday, also allowed companies the option of giving a conversion formula while issuing convertible instruments such as bonds as an alternative to upfront pricing.
A convertible bond is a debt instrument issued by a company that can eventually be exchanged for shares of that company. At present, the price at which the bond can be converted into stock, or the conversion price, is set when the bond is issued. The new policy guideline allows the company to issue only a conversion formula and not the price at the initial stage.
“This is expected to make investments by private equity firms more attractive,” said Gupt.
The new consolidated policy also allowed Indian companies to issue equity in return for capital goods and pre-operational expenses such as rent. So far, government only recognized flow of foreign cash as FDI.
The new measure, which “liberalizes conditions for conversion of non-cash items into equity, is expected to significantly ease the conduct of business”, DIPP said in a statement.
The industry department has also simplified and rationalized the categories of companies.
Now, there are only two categories: “companies owned or controlled by foreign investors” and the “companies owned and controlled by Indian residents”. It has done away with earlier categories like investing companies, operating companies and investing-cum-operating companies.
However, DIPP clarified that there is no change in policy in this regard.
“The distinction between investing companies and operating companies was relevant only in the context of the fact that FDI in an investing company requires FIPB approval. The same position persists even now.”
The DIPP secretary also clarified that the department’s policy regarding FDI in the banking sector remains the same. Under the new FDI guidelines issued in 2009, banks such as ICICI Bank Ltd and HDFC Bank Ltd were categorized as overseas-owned because of a foreign holding of more than 50% in them, even though their control remained with Indians, thus creating a regulatory challenge for the Reserve Bank of India.
“For our purpose of downstream investment, investments by ICICI Bank will be considered foreign investment,” Singh said.
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First Published: Fri, Apr 01 2011. 08 38 AM IST