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The Finance Ministry said it
is awaiting clarification from Department of Industrial Policy and Promotion (DIPP)
on the new foreign direct investment norms issued by it a year back, popularly
called the Press Notes 2 and 3.
“We are still in dialogue
with DIPP (on the issue). It is coming out with a comprehensive draft on the FDI
framework. Before that gets notified, we are hopeful these issues will get
clarified,” said Govind Mohan, Joint Secretary in the Finance Ministry, on
Monday at the inauguration of an e-filing facility for applications to the
Foreign Investment Promotion Board.
DIPP had last year issued
Press Notes 2 and 3 which replaced the earlier proportionate method of computing
foreign indirect equity by the parameter of beneficial ownership and control of
entities at each stage of investment.
It later also issued Press
Note 4 to clarify some of these issues. The Press Note 2 of 2009, issued on
February 13, redefined foreign ownership of Indian companies. An Indian company
means, in the context of Press Note 2, a company incorporated in India.
As per the new policy,
foreign investments of all types — FDI, portfolio or foreign institutional
investments, NRI investments, GDRs and ADRs, foreign currency convertible bonds
and preference shares —are taken into account while determining ownership of an
Indian company.
As per the new guidelines
the ownership of a number of banks such as ICICI Bank, HDFC Bank, Development
Credit Bank came under question, forcing the central bank and Finance Ministry
to seek a clarification. Not only this, there are concerns in various quarters
that the new norms may lead to breach of sectoral caps.
Under the current rules, as
long as an Indian promoter holds at least 51% stake in any operating-cum
investing company, the company would be considered an Indian entity and the
entire investment it makes in a subsidiary would be considered local investment.
This could allow such companies to invest in sectors in excess of sectoral FDI
caps or invest in sectors where foreign investment is not allowed. On the other
hand, the downstream investment of a company that has more than 51% foreign
stake will all be considered foreign investment.
The RBI had also raised the
issue of breach of sectoral FDI caps as foreign investors using a multilayered
structure can easily take their holding to much more than the sectoral cap if
their stake in the operating-cum-investing company is below 49%.
The Finance Ministry had in
December 2009 written to DIPP to clarify some of these contentious issues that
have also been raised by some other ministries. Recently, the Telecom Regulatory
Authority of India had put out a discussion paper on the impact of these new FDI
norms on the broadcasting sector. Puzzling Press Notes 2 & 3 raised questions
regarding the ownership of a number of banks such as ICICI Bank and HDFC Bank.
There are concerns in various quarters that the new norms may lead to breach of
sectoral caps.
(Source : The Economic Times, dated 17-3-2010)
