Finmin opposes FDI maths, wants review

Under the new rules for indirect foreign investments, issued
through Press Notes 2 and 3 last year, all investments by an Indian-owned and
controlled company will be classified as domestic investments, even if the
company has significant foreign stakes. The earlier norms counted only the
proportionate amount as FDI in the downstream subsidiary.

For example, if a 51 per cent Indian-owned company floats a
subsidiary with a 50 per cent stake, and the balance 50 per cent is held by
foreign investors, its entire 50 per cent investment in the subsidiary would be
counted as local investment under the new norm. This will allow the company to
invest in any sector, even those closed to foreign investment.

In telecom, for instance, which has a foreign investment
limit of 74 per cent, companies can now get foreign investment above the allowed
cap through a multilayered subsidiary structure. The flip side for companies is
that the total investments of those with more than 50 per cent foreign holding
in a subsidiary would be counted as foreign investment.

Leading Indian banks such as ICICI Bank, HDFC Bank and
Development Credit Bank would be considered foreign for the same reason.
Investments of these banks in a subsidiary would also be classified foreign.
This is not only a check on their investments in sectors with limits on foreign
investments, but also branch expansion.

Though the finance ministry had written to the DIPP earlier,
the communications were largely centred around the impact of the new FDI norms
on the banking sector. The ministry’s missives came after the RBI highlighted
the implications of the new norms on the banking sector.

(Source: The Economic Times, dated 05.01.2010)