To give a fillip to flagging foreign direct investment, the Department of Industrial Policy and Promotion has announced a slew of changes in its policies, including allowing overseas firms in existing joint ventures to operate simultaneously in the same business segments. Earlier, overseas companies needed the prior approval of their Indian partners.
The DIPP has also allowed companies to prescribe a formula for transforming convertible instruments (such as debentures, partly paid shares and preferential shares, among others) into equity at market conversion, but in accordance with the guidelines of FEMA and SEBI. According to the current norm, companies are required to specify upfront the price of convertible instruments.
The nodal agency has also classified companies into two categories — ‘companies owned or controlled by foreign investors' and ‘companies owned and controlled by Indian investors'. “The Government has done away with the earlier categorisation of ‘investing companies', ‘operating companies' and ‘investing-cum-operating companies', DIPP said.
However, DIPP has made no policy changes regarding the retail sector where 51 per cent FDI is currently allowed in single brand retail trade only.
Among the changes, Indian companies have been given flexibility in raising overseas capital by allowing them to give equity to suppliers to fund imports of machinery and capital goods. Besides, it has liberalised conditions for seeking foreign investment for the production and development of agriculture seeds.
During the first 11 months of this fiscal (April-February), FDI inflows into India declined by 25 per cent to $18.3 billion. India has received $144 billion of foreign direct investment since 1991, when it first opened the economy to foreign inflows.
“FDI Policy is part of the ongoing efforts of procedure simplification and FDI rationalisation,” the Commerce and Industry Minister, Mr Anand Sharma, said.
Positive response
Doing away with the need for overseas companies to seek the prior approval of their Indian partners to invest in the ‘same field', which was referred to as Press Note 1, has received a positive response from the industry. Mr Chandrajit Banerjee, Director-General, CII said, “Given the fact that six years have elapsed since 2005, industry would not have any issue with the move… The provision was an interim safeguard mechanism.” Currently, , a foreign player who entered India before January 12, 2005, has to take Government approval and demonstrate that fresh investment in the same field would not affect the interests of his domestic joint venture partner. The changes would help foreign investors who entered into JVs after this date.
“The provision was discriminatory...we feel that some Indian companies were unfairly blocking the new companies from coming up,” DIPP Secretary, Mr R.P. Singh, said
Regarding changes made in the guidelines for downstream investment, the decision would have a bearing on companies with majority foreign equity, as they would now be classified as foreign companies. For instance, ICICI Bank, in which more than 50 per cent equity is owned by overseas entities, will now be treated as a foreign company for the purpose of computing FDI.
DIPP said, “The new policy will permit issue of equity for import of capital goods, machinery and equipment. The facility for conversion of capital goods import into equity was earlier available to companies raising external commercial borrowings”.