India notifies what constitutes foreign investment

February 17th, 2009 - 7:07 pm ICT by IANS  

New Delhi, Feb 17 (IANS) India Tuesday notified the detailed norms on what constitutes foreign equity in companies that operate in sectors with a cap on overseas investment, after the cabinet rationalised the procedures last week to attract more foreign capital.
A press note issued by the commerce ministry says foreign investment of any form in a holding company - equity, preference shares, investments by foreign funds, convertible bonds, American depository shares or global depository receipts - will be considered foreign equity.

But that domestic holding company’s foreign equity component in another company will not be taken into account while calculating the sector-specific foreign investment limit, if the holding firm is majority-owned and controlled by Indians.

In other words, if the foreign equity component in the holding company is less than 50 percent, that company’s subsequent investment in another company will not constitute foreign equity.

“But FIPB (Foreign Investment Promotion Board) approval is required by investing companies for downstream investment,” the press note said.

“The full details about the foreign investment including ownership details in Indian company and information about the control of the company would be furnished by the company to the Government of India at the time of seeking approval,” the note added.

Prior to the new norms, the ceiling on foreign investment in a company was being worked out on the basis of both the direct stake of the foreign partner plus the pro-rata foreign direct investment in the equity of the domestic partner.

But the ministry of commerce and industry, as also several stake-holders, had wanted these norms recast since it was causing complications and being subject to misuse in sectors such as telecommunications and media.

Following the cabinet decision Feb 11, some opposition parties, especially the Left, had said that the revised guidelines were tantamount to back door entry for foreign investment in areas that otherwise had sectoral caps.

But Commerce Minister Kamal Nath defended the decision, saying Indian companies in any case were allowed to access foreign funds. “The present guidelines correct the anomalous situations created by the old system for calculating foreign investment.”

Chidambaram, who had briefed reporters after the cabinet meeting presided over by External Affairs Minister Pranab Mukherjee, also said that the idea was to clear any ambiguity in the guidelines.

“The objective is to make the norms simple and transparent.”

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