New Delhi: The new Foreign Direct Investment policy will not allow foreign investors to enter prohibited sectors like multi-brand retail or breach sectoral caps as safeguards have been provided in the foreign exchange laws, the DIPP has said.
“In general adequate measures are available under (the) Foreign Exchange Management Act (FEMA), as safeguard against any violation of the FDI policy,” the department of industrial policy and promotion (DIPP) said in a letter to the finance ministry earlier this month.
The finance ministry had raised its own concerns and the apprehensions of the Reserve Bank of India (RBI) with the DIPP over the possible misuse of the new policy.
As per the Press Note 2 of 2009, if foreign investment in an Indian firm is less than 49%, there is no bar on it to enter the sectors prohibited for overseas investment. This is because foreign investment below 50% through an investing Indian company would not be considered for calculation of indirect overseas equity.
This had led to confusion not only among the industry but also in the finance ministry and RBI.
“FDI policy could be circumvented by setting up companies where non-resident entities who hold 49% and downward investment could be into prohibited sectors or result in breach of caps,” the finance ministry had said in a letter to the DIPP.
It further said that the new FDI dispensation could lead to formation of ‘shell´ companies for the purpose of downstream investment in restricted/prohibited sectors.