Crisis over, govt gets cracking

FDI cap for small scale sector may be hiked.

The government is likely to revisit the 24 per cent foreign direct investment (FDI) limit in the small scale sector, dilute norms in Press Note 18, that allow an Indian company to block its overseas joint venture partner from floating another outfit, and do away with the requirement to seek approval from the Foreign Investment Promotion Board (FIPB) for routine proposals like non-resident Indian (NRI) stake transfer and gifting of shares.

Senior government officials told Business Standard the new industry and finance ministers would be apprised of these issues, after which a proposal would be placed before the Cabinet.

At present, units with a turnover of up to Rs 1 crore are classified as small scale in which foreign direct investors are prohibited to have more than 24 per cent equity. Higher equity proportion by Indian companies in SSIs is permitted if 50 per cent of the output is exported.

According to officials, the 24 per cent FDI limit together with the 50 per cent export obligation placed restrictions on the ability of small scale industries to raise capital and attract funds.

"While we have not specifically sought an increase in the FDI limit, we have said the policy should be reviewed and there should be a full discussion," an official said.

The NK Singh steering group on FDI had recommended raising the equity limit to 49 per cent. "This will not only ease the financing constraint but promote backward and forward linkages with medium to large domestic and foreign industries.

"Such synergy is essential for the healthy growth of both sectors and for enhancing industrial efficiency and competitive strength," the report said.

The officials also said the dilution in Press Note 18 would be to prevent the Indian partners of defunct joint venture companies from blocking the foreign partners' move to float another outfit in the same business.

"The foreign company today has to necessarily obtain a no-objection certificate from its Indian partner. This needs to be changed," an official said.

Besides these two issues, which require Cabinet clearance, the FIPB is also keen that routine proposals like that of NRI stake transfers in joint venture companies and gifts of shares by one shareholder in a joint venture to another shareholder, need not come to the board for approval.

"These are routine proposals and should be automatically cleared," said the official.