India Opens Doors Wider to FDI

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Feb. 12 – Innovative thinking has lead the Indian government to offer India Inc a better deal than any stimulus package could have. In a sweeping move to usher in more FDI into India, the Cabinet Committee on Economic Affairs (CCEA) released a statement stating that equity investments routed through companies in which a majority ownership and control is in the hands of Indians would be treated as fully domestic equity. This effectively then nullify’s any FDI caps in the industry allowing room for millions of dollars to flow in. The retail, telecom, insurance and aviation sectors are expected to benefit most from the move.

Former Finance Minister P. Chidambaram told the Economic Times, “All investments directly by a non-resident entity into an Indian company will be counted as foreign investment, while foreign investment through an investing Indian company will not be considered for calculation of the indirect foreign investment, in case the Indian company is owned and controlled by resident Indian citizens.”

The landmark change in policy means that a company with 60 percent Indian equity and 40 percent foreign equity would be treated as a company with zero FDI. Previously if the same company had invested Rs 100 crore in another firm, Rs 40 crore of this amount would be treated as FDI.

PWC executive director Vivek Mehra told the Times of India that the new norms will allow foreign investors to invest in the retail sector. Here's how: Foreign company 'A' can form a 49:51 JV, company 'C', with an Indian company 'B'. C will qualify as Indian. If it now invests in another downstream company 'D' to any extent below 100 percent, even up to 99.99 percent, D will be treated as having no FDI. Since D has no FDI, it can operate in any sector including retail, in which FDI is not allowed.

The only exception to the rule will be that a foreign-Indian joint venture company that creates a wholly-owned subsidiary in India would not be eligible to call themselves an Indian company. Under these circumstances, the foreign stake in the subsidiary company will be considered as equal to the stake in the holding company. Similarly a company that is majority owned/controlled by foreign investors would be treated as foreign investment.

“The guidelines for transfer of ownership from a resident Indian citizen to non-resident Indian entities are being revised too,” P. Chidambaram added to ET. He said that for sectors with caps such as defence production, air transport services and telecom government and foreign investment promotion board (FIPB) approval will be required.