New Delhi: India may soon plug a loophole in new foreign direct investment (FDI) guidelines by keeping “sensitive sectors” such as multibrand retail out of its ambit.
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The new guidelines, issued by the department of industrial policy and promotion (DIPP) in February, create the scope for a foreign firm to invest in sectors where FDI is prohibited, by setting up a joint venture with an Indian partner and holding a minority stake—defined as anything up to 49.99%—in it. These firms would be considered Indian if they had an Indian management, the guidelines said.
Indeed, analysts had pointed out soon after the guidelines were announced that because they considered all downstream investments by such companies to be domestic and not foreign, it was possible for the foreign company to actually have a beneficial majority stake in operating firms by taking an up to 49.99% stake in the holding company, and a further stake in the operating subsidiary.
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Subsequent efforts to shed clarity on the guidelines remained ineffective.
Admitting the existence of this loophole, an official at the ministry of commerce and industry said that once a new minister takes charge, the issue would be clarified.
“The impact of the new guidelines on the sensitive sectors will have to be looked into,” the official added on condition of anonymity. DIPP falls under the purview of the ministry of commerce and industry.
Akash Gupta, executive director at audit and consulting firm PricewaterhouseCoopers, said it is important that the clarification comes soon because “ industry is perplexed”.
“Strictly reading Press Note 2 (through which some of the guidelines were issued) suggests that investments by an Indian owned and controlled company is not to be considered as FDI. It does not also differentiate between prohibited and non-prohibited sectors.”
The finance ministry and the Reserve Bank of India (RBI) have already opposed various provisions in Press Notes 2, 3 and 4 (through which the guidelines were issued) and have written letters to DIPP expressing reservations.
RBI has said the new guidelines may lead to circumventing the FDI policy, either by breaching of the FDI cap or by inadvertently allowing foreign investments in sectors where FDI is prohibited. Apart from the multibrand retail, the new guidelines may usher in investment in prohibited sectors such as atomic energy; lottery, gambling and betting; real estate other than the construction and development of townships; and agriculture.
The central bank has also said that the new guidelines could lead to the formation of “shell” companies whose sole intention would be to make downstream investment in sectors with FDI restrictions, or with sectoral caps.
The finance ministry has said that the revised guidelines have made any sectoral cap of 49% and below meaningless in terms of downstream investment by a company that is majority Indian owned.
As reported by Mint on 28 April, DIPP has started discussing with RBI and the finance ministry, revisions to the new FDI guidelines for banks so that some domestic banks do not have to be reclassified as foreign-owned entities.
Under the new guidelines, seven banks—ICICI Bank Ltd, HDFC Bank Ltd, Yes Bank Ltd, IndusInd Bank Ltd, Federal Bank Ltd, ING Vysya Bank Ltd and Development Credit Bank Ltd—could be categorized as foreign-owned because foreign investment in them, including portfolio investment, exceeds 50%.
Meanwhile, DIPP has extended the deadline for foreign investors to bring down their holdings in commodity exchanges to below 5% till 30 September. According to FDI guidelines, a composite ceiling for foreign investment of 49% is allowed subject to the condition that portfolio investment will be limited to 23%. No foreign investor, including persons acting in concert, is allowed to hold above 5% of the equity in the commodity exchanges.