In a landmark decision, the government has eased norms for investments by foreign companies that are present in India through a joint venture (JV) or a technical collaboration.
Now, the foreign company will not have to seek a no-objection certificate from the Indian partner for investing in the sector where the joint venture operates.
The government has also relaxed norms for downstream investments and convertible instruments, giving foreign companies more powers. The aim is to check a decline in foreign direct investment (FDI) inflows.
The changes are part of the third revision of the Consolidated FDI Policy. The new norms apply from tomorrow.
| FRIENDLIER POLICY |
| * No approval needed from Indian partner in JV/technical collaboration for a new venture |
| * More leeway for foreign companies on downstream investments and pricing of convertible instruments |
| * More liberal policy on non-cash share allotment to foreign companies |
MORE FDI AIM
The Department of Industrial Policy and Promotion (DIPP) under the commerce ministry had issued the first Consolidated FDI Policy in April last year, saying it would be updated every six months. “This is part of our ongoing efforts for procedure simplification and rationalisation which will go a long way in inspiring investor confidence,” Commerce and Industry Minister Anand Sharma said after releasing the policy on Thursday.
“The condition of prior approval was leading to several dumping cases and litigation. People seek to rent out (NoCs). So, it is being done away with, to attract fresh investments,” said DIPP Secretary R P Singh. Some important approvals stuck due to the NoC issue included Goldman Sachs’ plan to invest in a non-banking finance company.
Experts and analysts say this will increase FDI inflows. “Abolition of this condition would give more confidence to investors who were strangulated by their partners. This would be a milestone in the formulation of the country’s FDI policy. The various (pending) cases would now be put to rest and we might see those investments finally coming in,” said Akash Gupta, executive director, PricewaterhouseCoopers.
The Federation of Indian Chambers of Commerce and Industry said this would arrest the continuing decline in FDI inflows.
DIPP has also relaxed the norms for convertible instruments to encourage private equity (PE) and venture capital deals. At present, the pricing of capital instruments issued to foreign investors is supposed be decided upfront, at the time of issuance. Investors say this deprives them of a better valuation in case the company peforms better than expected.
Now, companies will have a choice between specifying the price of convertible instruments upfront or prescribing a conversion formula, so that the investors can get a higher premium if the company does well.
“The amendments have solved a lot of problems and will make the policy more investor-friendly. The markets will take this extremely positively in terms of boosting investor confidence,” said Yashojit Mitra, associate partner, Economic Laws Practice.
OTHER CHANGES
DIPP has also clarified position on downstream investments by Indian companies that have more 50 per cent foreign equity and are categorised as foreign companies for investment purposes. However, it has not changed the policy itself.
So, for example, if ICICI Bank, which is around 77 per cent owned by foreign entities, decides to invest in the telecom sector, the FDI limit of 74 per cent will apply to it.
“For downstream investment, we want to be sure that the parent company is controlled and owned by Indians. ICICI Bank is incorporated in India but it has foreign equity of more than 50 per cent. So, for investment purposes, it is owned by foreigners,” said DIPP’s Singh.
In February 2009, DIPP had issued Press Notes 2,3 and 4, which stated that companies with more than 51 per cent foreign equity would be classified as foreign companies.
The government has also relaxed the policy on domestic companies issuing shares to foreign companies for consideration other than cash. However, in doing so, the companies are required to comply with overseas direct investment regulations.
Such companies often resort to share-swap transactions. DIPP suggested that share-swaps could continue to be permitted through the government route, subject to certain conditions.
Under the present policy, shares can be issued to a non-resident against receipt of funds through normal banking channels. However, Indian companies at times are given permission for conversion of external commercial borrowings into shares and preference shares, subject to FDI and Securities and Exchange Board of India regulations.
In another step, the government has removed certain conditions for foreign companies involved in development and production of seeds and planting material. According to the present policy, the government allows 100 per cent FDI in seeds. However, that is subjected to certain conditions, which have been removed.
