Government Plans to Alter FDI Policy for JV’s

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Sept. 5 – The Indian government is planning to rework the foreign direct investment (FDI) policy for holding companies. According to the regulations, joint venture companies with foreign equity will need to seek fresh approval from the Foreign Investment Promotion Board (FIPB) within 90 days while investing in downstream companies like subsidiaries.

The FIPB clearance will be mandatory to avoid imposition of penalty by the Reserve Bank of India (RBI). The government said detailed guidelines for downstream investments by joint ventures with foreign equity will be issued shortly. These companies will be given a three-month grace period for regularising downstream investments, according to the Economic Times.

FIPB’s contention is that companies usually obtain permission to function as operating companies and clearance for holding companies is obtained specifically by investment companies looking at downstream investments. Confusion arises only when a company which is into operations wants to invest in subsidiaries or joint ventures.

According to the FDI policy, companies with foreign investment have to obtain prior approval from FIPB for investment in other companies. Clearance from the board is necessary even if the company in which stake is being picked up is from a sector where 100% FDI is allowed through the automatic route. When violations come to light, FIPB recommends compounding by RBI.

The government has also decided that issue of equity shares by an Indian company to persons of Indian origin and non-resident Indians would be allowed through the automatic route. The norms on conversion of lump-sum fee for tech transfer, royalty and import of capital goods into equity is also being liberalised, officials said.

Once these norms come into place, companies can convert even interest payments into equity much faster. Due to lack of clarity regarding downstream investments by Indian holding companies, many companies do not seek FIPB approval though it is mandatory.

The government also intends to issue a Press Note regarding capitalisation of import payables by liberalising the existing policy. “The government has been receiving requests for allowing issue of equity shares against import of capital goods, components, kits, spare parts and approved pre-operative expenses, since monetisation of these non-cash transactions is possible. Hence, the government will consider issue of equity shares on such grounds through the automatic route for sectors where 100% FDI is allowed,” an official said.

The government may, therefore, allow issue of equity shares against non-cash considerations like lump-sum payment for technology transfer, royalty, interest on external commercial borrowings, import of capital goods and pre-operative expenses.

Commission brokerage, preliminary expenses, interest paid on capital and other developmental expenditures also fall under this category, officials said. Once the new norms come into place, companies could issue equity shares against import of products from a foreign company instead of paying in cash.