In view of the objections raised by the Reserve Bank and the Department of Economic Affairs (DEA), the new government may make comprehensive changes to Press Notes 2, 3 and 4, which were issued in February.
Even with a clear mandate, the Congress-led United Progressive Alliance government is unlikely to allow foreign direct investment (FDI) in sensitive sectors such as retail and may like to revisit the recently issued norms that give companies elbow room in dealing with the FDI norms.
In view of the objections raised by the Reserve Bank and the Department of Economic Affairs (DEA), under the Ministry of Finance, the new government may make comprehensive changes to Press Notes 2, 3 and 4, which were issued in February.
The press notes sought to simplify the method for calculating FDI and broadly stated that as long as Indian promoters held a majority stake (more than 51 per cent) in an operating-cum-investment company, they could bring in investments up to 49.9 per cent through FDI. This company would be treated as an Indian company and could invest through a joint venture in any other company that may operate in sectors with FDI caps.
The immediate agenda of the government will be to ensure that the FDI norms, and the press notes, are in sync with the existing guidelines for sectors that either allow restricted FDI (such as news media) or do not allow any foreign investment (such as multi-brand retail).
According to the RBI, the press notes raise the possibility of “circumventing the definition of ownership and control by downstream investment” in sectors in which FDI is prohibited, or requires government approval, or where sector caps are in place.
It is unlikely that the government would relax the foreign investment in some key areas such as retail or media in the immediate future. However, some pending proposals like raising the limit in insurance to 49 per cent from 26 per cent, allowing proportionate voting rights in banking, and opening the pension sector to the private sector are likely to take priority.
Within weeks of the press notes being issued, several companies like Pantaloon Retail India Ltd and UTV Software Communications Ltd indicated that they would bring in foreign investments in line with the new guidelines.
Pantaloon wants to bring in FDI in retail by creating a multi-layer investment-cum-operating structure.
