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Government nixes move, divestment clause in NBFC sector to stay

Partha Ghosh

The government has dropped the proposal to remove the divestment clause applicable to Indian subsidiaries of foreign firms in certain sectors such as non-banking finance companies and tea and coffee plantations, except where it is specifically waived in the sectoral policy.

As per the sector specific clause, MNCs are allowed to hold more than the prescribed FDI cap (usually 74 and 75 per cent) for a specified period (between three to five years) after which they are required to bring their holding down to the ceiling through divestment of the additional equity in favour of resident shareholders or the public.

The proposal, which was mooted by the Ministry of Finance, was reconsidered by the group of ministers on FDI headed by Finance Minister Yashwant Sinha before being sent to the Cabinet Committee on Economic Affairs for approval.

But the Department of Industrial Policy and Promotion in the Union commerce and industry ministry demanded that the condition may continue, except in sectors where the condition is specifically waived, officials said.

As a result, the divestment clause in the NBFC sector remains, while the same is no more applicable in the case of drugs and pharmaceuticals where 100 per cent FDI is allowed through the automatic route, the officials said.

In fact, even in the case of drugs and pharmaceuticals, the DIPP had proposed that 100 per cent FDI be permitted with a condition that the subsidiary will divest 26 per cent within five years. It was, however, felt that unconditional liberalisation of FDI policy should be undertaken across the board rather than on a sector by sector basis.

If most other sectors are not being opened up unconditionally, then it would be rather proper at this stage to retain the condition of divestment of 25 per cent or 26 per cent of the equity in favour of resident shareholders, including the public.

For example, in the case of NBFC sector, categories of investment (such as where the wholly-owned company is not bringing in $50 million as capital) will still be required to divest 25 per cent stake to resident shareholders within three years.

A similar clause will be applicable to the plantation companies if 100 per cent holding is permitted by the government.

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