New policy plugs loopholes for backdoor entry

Concerned over the continued decline in foreign direct investment (FDI) over the last few months, the Central Government on Thursday unveiled a major policy reform allowing flexibility for Indian companies to raise funds from abroad. At the same time, it plugged the loopholes for backdoor FDI entry breaching sectoral caps.

The new circular issued by the Department of Industrial Policy and Promotion (DIPP) on Thursday states that under the new norms, Indian companies have been allowed to issue equity against import of capital goods and liberalise conditions for seeking foreign investment for production and development of agriculture seeds.

The facility of conversion of capital goods import into equity was earlier available for companies raising external commercial borrowings (ECBs).

Union Commerce and Industry Minister Anand Sharma said the Circular 1 of 2011 third edition of the Consolidated FDI Policy was part of ongoing efforts of procedure simplification and FDI rationalisation which will go a long way in inspiring investor confidence.

The government also removed the restrictive condition of obtaining prior approval of Indian companies for making investments in the same field. “It is expected that this measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country,” it said.

In order to plug the loopholes in the system, the government has classified companies into two categories — companies owned or controlled by foreign investors and companies owned and controlled by Indian investors.

The government has done away with the earlier category of investing companies, operating companies and investing-cum-operating companies.

The decision would have a bearing on the companies with majority foreign equity as they would now be classified as foreign companies. The policy guidelines are revised every six months.

It further said that the companies would be free to prescribe a formula for transforming convertible instruments (like debentures, partly paid shares, preferential shares and the like) into equity in accordance with the guidelines of FEMA and SEBI.

Earlier, they were required to specify upfront the price of convertible instruments. The decision would help the recipient companies in obtaining a better valuation based upon their performance, it added.

Officials said the fine-tuning of the FDI norms was aimed at ensuring the country attracted more and more FDI. During the 11-month period (April-February) this fiscal, FDI inflows into India declined by 25 per cent to $18.3 billion.

Keywords: economic policyFDI