The government on Wednesday relaxed guidelines on foreign direct investment (FDI) for companies owned and controlled by Indian citizens. This effectively means that foreign investment in FDI-restricted sectors like telecom, defence production and single-brand retail can cross set limits.
Hindustan Times first reported this on December 25. The cap is on
This means that in sectors like telecom where 74 per cent FDI is permitted, foreign investment can go up to as high as 98 per cent through a structure that allows the Indian promoter to hold his stake through another company in which the foreign investment can be 49 per cent.
The new guidelines also say that an investment made by a “non-resident entity” into an Indian company would be counted as foreign investment.
The move is likely to meet with wide industry approval, and political opposition.
“The adoption of the guidelines will simplify, streamline and rationalise the method of calculation of indirect foreign investment across sectors,” Union home minister P. Chidambaram told reporters.
“The new guidelines pave the way to break the sectoral cap barrier by financial engineering and restructuring,” said B.K. Syngal, senior principal, Dua Consulting, and former chairman and managing director of VSNL.
The government had done away with this policy in telecom in 2005, saying this “loophole” was exploited by some companies like Hutch Essar to increase foreign equity beyond the permitted 49 per cent.
As a result, the government was compelled to increase the FDI ceiling in telecom from 49 per cent to 74 per cent. However, it was made clear the 74 per cent ceiling will include both the direct and indirect foreign component in the company.
The industry has welcomed the government initiative. “It is simplification of the complicated earlier guidelines,” said Sheshagiri Rao, group director of finance for JSW Steel.
The head of a large telecom firm, who wished to remain anonymous, said, “Any simplification of FDI guidelines is good for the industry as it will help in attracting foreign investment.”