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Definition change to skirt FDI caps

Definition change to skirt FDI caps
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First Published: Thu, Feb 12 2009. 01 25 AM IST

Photo: Ramesh Pathania / Mint
Photo: Ramesh Pathania / Mint
Updated: Thu, Feb 12 2009. 01 25 AM IST
New Delhi: In a move that could help attract foreign capital into what is still one of the world’s fastest-growing economies, the Congress-led United Progressive Alliance (UPA) on Wednesday revised foreign direct investment norms that effectively dilute contentious investment ceilings in many sectors such as telecom, insurance and aviation.
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The press statement issued by the government states that the new norms will apply to those sectors which have investment ceilings.
In doing so the government has also worked around the sensitive issue of relaxing FDI ceilings in an election year, though the way the changes have been made has been questioned by experts as well as key political opponents such as the Bharatiya Janata Party (BJP) and the Left parties.
Significantly, several frontline ministries such as finance, telecom and information and broadcasting had opposed the revision in norms proposed by the commerce and industry ministry, arguing that it would breach the existing investment ceilings.
The new norms state that management as well as economic control would be the defining criteria for determining whether or not a foreign holding was to be treated as FDI. In other words if a company was “ultimately” owned and controlled by resident Indian citizens, the foreign holding will not be taken into account for calculating the FDI ceiling.
Photo: Ramesh Pathania / Mint
Two lawyers, who did not want to be named, independently confirmed that the cabinet announcement would allow actual foreign holding in a company to exceed the mandated ceiling.
The foreign investor could buy into a target company up to the permitted ceiling, and also take minority stakes in Indian companies which are stake holders in the target company.
But in the process, the foreign holding could exceed the ceilings and still not be a violation.
This will benefit several companies that have aggressively pursued FDI and have been found to be in violation if the earlier norms had been applied strictly.
Apurba Mehta, associate director, advisory services, KPMG, said that the new guidelines are meant to give clarity to the differentiation of global parentage and local parentage.
“In an election year, government could not have directly increased FDI caps in various sectors because of the sensitiveness of the issue. So it has allowed more foreign investment in a less open way,” Mehta said.
Foreign holding in Indian companies has been gradually liberalized since 1991 though at a varied pace across sectors.
According to one of the lawyers who spoke to Mint, sectors such as broadcasting also have guidelines on foreign investment which supplement the overall FDI guidelines.
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As a result, the lawyer argued, these guidelines will have to be synchronised with the new norms.
Interestingly, the change in norms had been opposed by the ministries of finance, telecom and information and broadcasting.
“It is done completely against our wishes. We don’t see why this should not be considered indirect FDI. We are completely surprised,” said a finance ministry official who spoke on the condition of anonymity.
During inter-ministerial discussions on the issue, the telecom and information and broadcasting ministries have said the proposals would lead to a breach of existing sectoral caps.
The home ministry also held that it was essential to see that acquisition of the Indian firms in sensitive sectors was not made easy as a result of the proposal.
The information and broadcasting ministry has also said that media being a sensitive sector, it should be ensured that management and control in Indian companies by foreign companies in the sector was not permitted through any measure in the proposed “liberalization” of rules.
Earlier, in a meeting of the group of ministers on the issue, it was resolved that the new guidelines “do not lead to passing of management control in sensitive sectors from residents to non-residents where present policy based on sector caps does not envisage such eventuality.”
Effectively though, the decision by the Cabinet Committee on Economic Affairs (CCEA) on Wednesday goes beyond this caveat.
The government’s decision, a day ahead of convening a two-week session of Parliament to pass an interim budget ahead of general elections due before May, drew sharp rebuke from key political parties.
“This is nothing but providing a back door entry for the FDI violating the ceiling norms. Secondly, this note does not specify the sectors, which is very dangerous. It can apply to critical sectors like telecom which could impinge on our security also. The government chose to take the eve of parliament commencing to take such a decision bypassing the parliament. We will raise this issue in parliament. We are opposed to any facilities given for money laundering,” Sitaram Yechury, Rajya Sabha MP and politburo member of the Communist Party of India (Marxist) said.
Similarly, former finance minister Yashwant Sinha said that the decision would be met with “stiff opposition”. “This will be met with stiff opposition. Even we, who are reformists par excellence, cannot support a sweeping concession of this kind. In any case, such a move will not help them increase foreign investment since what the investors are looking for is a transparent regime and not really an increase in investment cap. This is absolutely uncalled for and would have drastic consequences.”
However, Congress spokesperson Manish Tiwari said that the CCEA decision was a logical one.
”If there is an entity that is registered in India, how can it (investment in the company) be taken as FDI?” Tiwari further said that the government had found the earlier method of calculating foreign investment to be erroneous and that this measure was only a corrective one.
Shauvik Ghosh, Ruhi Tewari, Sangeeta Singh and Liz Mathew contributed to the story.
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First Published: Thu, Feb 12 2009. 01 25 AM IST
More Topics: FDI | UPA | Congress | Sectoral caps | CCEA |