Foreign investment law in the works

The Government is working on a proposal to
introduce a new legislation relating to foreign investment aimed at removing
the distinction between various categories of overseas capital, a move
intended to ensure stability in policy and help Indian firms attract long-term
capital.

The new Foreign Direct Investment Act would seek
to remove the distinction between various categories of overseas fund flows
such as portfolio investment, venture capital, private equity and direct
investment. Rules on external investment in Indian companies make a
distinction between portfolio investment, in which an investor buys shares of
a company from the secondary market, and foreign direct investment (FDI), in
which the investor normally acquires a relatively larger holding directly.
The new legislation would involve major changes to the existing Foreign
Exchange Management Act, or FEMA, which deals with both inbound and outbound
foreign investment.

The new legislation would remove all confusion
and provide stability in terms of policy. The Finance Ministry has already
started work on the new legislation and would seek inputs from the Reserve
Bank (RBI) on it, the official said. The new Act will also give clearer
guidelines on convertibility.

The RBI has consistently been of the view that in
the hierarchy of preferred capital flows, FDI ought to be at the top. The
current policy is largely ad hoc. It is governed by several rules that
are changed through so-called ‘Press Notes’ issued from time to time by the
Department of Industrial Policy and Promotion (DIPP) and FIPB. Interestingly,
the official said the Press Notes issued by the DIPP have no legal sanctity
since changes to guidelines on foreign investment require changes to FEMA
rules, which rarely gets done.

(Source : The Times of India, 8-8-2009)