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Demystifying foreign direct investment

business Updated: Feb 16, 2009 10:58 IST
Manoj Gairola

With barely two months for elections, the government has relaxed FDI norms in Indian companies. The new guidelines say that foreign investment can cross sectoral caps and in sectors like multi-brand retail, foreign investment has been permitted through investing companies owned by Indians.

Manoj Gairola

demystifies FDI:

What is foreign direct investment (FDI)?

An investment by a non-resident entity in an Indian company is termed as FDI.

What is the reason to formulate the new guidelines?

Earlier, there were different criteria for calculating FDI in different sectors. For example, in telecom and broadcasting sectors, indirect foreign investments in a company through Indian investing companies is treated as foreign investment.

In all other sectors except defence, foreign investment in an investing Indian company is not setoff against FDI cap.

What are the guidelines?

The new guidelines say that in all sectors equity investments routed through companies in which majority ownership and control is in the hands of Indians would be treated as fully domestic equity.

What is the impact?

It means that foreign investment in FDI-restricted sectors can cross set limits. The Indian entities can form multi-layered structures of investment companies in which all companies are owned and controlled by Indian residents. In this manner, foreign equity in sectors like telecom where 74 per cent FDI is permitted, can go up to as high as 98 per cent.

What is the opposition?

Before 2005, the government had a similar policy of calculating FDI in the telecom sector. But it was exploited by some companies like Hutch Essar to increase foreign equity beyond the permitted 49 per cent.

What is the defence?

The government says that the adoption of the guidelines will simplify, streamline and rationalise the method of calculating indirect foreign investment across sectors.