Govt overhauls foreign investment norms

The Government has decided to give in to the long-standing demand to tweak foreign investment norms. The Cabinet on Wednesday okayed the rationalisation and simplification of FDI guidelines.

As per the new norms, composite FDI would now include direct and indirect foreign investment. Trade and Commerce Minister, Kamal Nath, announced that all investments directly by non-resident Indians (NRIs) would now been seen as FDI, while all investments would be deemed domestic if the entity through which the fund is pumped in is owned/controlled by a resident Indian.

Addressing a press conference, Home Minister P Chidambaram, also the former Finance Minister of the country, said, “All investments directly by a non-resident entity into an Indian company will be counted as foreign investment, while foreign investment through an investing Indian company will not be considered for calculation of the indirect foreign investment, in case the Indian company is owned and controlled by resident Indian citizens.” Chidambaram added the definition of the words owned and controlled would be included in the revised guidelines.

"The guidelines for transfer of ownership from a resident Indian citizen to non-resident Indian entities are being revised too," Chidambaram said, adding, "For sectors with caps such as defence production, air transport services etc., Government and FIPB approval will be required in enumerated cases."

Commenting on the development, Managing Partner of law firm Majmudar & Co, Akil Hirani, said issues related to the terms ‘owned’ and ‘controlled’ have not been addressed in the new policy. "There are different permutations and combinations of ownership and control and that has really not been addressed, which will probably lead to significant confusion going forward," Hirani said.

Head Capital Markets, Nishith Desai Associates, Vyapak Desai, echoed Hirani’s view. “Some clarity is required on companies, which have a foreign entity as a majority shareholder,” he said.

On February 3, the Group of Ministers (GoM) had met to discuss the issue of FDI norms following up on a proposal by the Department of Industrial Policy & Promotion (DIPP).

The DIPP had earlier called for rationalising the guidelines for foreign investment through the FII and FDI route.