The policy on foreign direct investment in trading activities is likely to be referred to a core group of secretaries.

The chairman of the foreign investment promotion board, Finance Secretary S Narayan, has asked the secretariat of industrial assistance to place before the board a list of all cases since January 2002 where a foreign company has sought permission for cash and carry wholesale trading for the same product for which test marketing approval had been given by the FIPB earlier.

The FIPB took the decision following a recent observation by the commerce ministry that in case a company had been unable to meet its obligation to manufacture, it would not be appropriate to decline them cash and carry whole sale trading rights.

The commerce ministry's observation this time around was different from its own, and that of other departments, like the department of industrial policy and promotion in the industry ministry, in several previous cases.

Sources said that the FIPB has also asked the SIA to give details of the decisions taken on each case. The board will deliberate on the decisions to ascertain if there has been a consistency in the decisions, and to detect any startling increase in cash and carry wholesale business in lieu of test marketing.

The department of commerce has also been directed to ascertain from its records if this issue had been deliberated on by a body higher than the Board so as to clarify the factual position on the issue. A government official said that after a study by the FIPB, the policy on trading is likely to be taken to a higher body like the Core group of Secretaries or a GoM for further deliberation.

The issue of allowing FDI in trading has become debatable after the government lifted quantitative and qualitative restrictions on imports. Most items are now free to import unless it is on a small negative list. However, the government discourages FDI in trading.

Off late, it has come to the notice of the government that several companies which had originally sought approval for test marketing rights has come back to the FIPB seeking nod to carry out cash and carry wholesale trading. The government permits FDI in cash and carry wholesale trading.

But to promote manufacturing in India, it had imposed conditions that test marketing will be permitted for a maximum two year period during which the company will set up manufacturing facilities in the country.

The government source explained that companies coming back to the government to change test marketing plans to carry out cash and carry wholesale trading would go against the government's intent of opening FDI to promote domestic manufacturing, and thereby generate additional employment. "Each and every company will resort to similar modus operandi," he said.

The source also pointed out that by ceasing to test market its products and resorting to cash and carry wholesale trading, the company was actually violating the FDI norms for test marketing. The rights had been granted to the company on the condition that they will set up a manufacturing facility.

The companies adhere to this condition when seeking permission to test-market its products. But later, they turn back and say that they are not in a position to start manufacturing because of certain reasons.

"By reneging on their obligations against test marketing rights, these companies are actually resorting to imports (trading) where FDI is not permitted," the official explained.

Foul play

• The government has noted that several companies that had originally sought approval for test-marketing rights had come back to the FIPB seeking nod to carry out cash-and-carry wholesale trading.
• Test marketing is permitted for a maximum of two years during which the company has to set up manufacturing facilities in the country.
• However, companies often say they are not in a position to start manufacturing because of certain reasons and resort to trading where FDI is not permitted.