India and Singapore are negotiating flexible sector caps on foreign direct investment and investment protection guarantees on inward inflows from either country.

If the proposals on flexible sector caps materialise, Singapore-based companies will be allowed to pick up stakes in select sectors over and above the permissible limits, and vice versa. The two countries will also provide preferential treatment to FDI from each other by relaxing entry procedures and through legal guarantees.

Government officials involved in the negotiations with Singapore on the proposed Comprehensive Economic Cooperation Agreement told Business Standard that Singapore had sought flexible FDI limits on outward investments from the city nation, especially in some key services sectors such as telecommunications, financial services and aviation. India is, however, yet to take a decision on this.

The seventh round of negotiations ended last week and more discussions will be held in the coming months.

A flexible FDI regime will be particularly beneficial to Singapore-based firms because while India has restrictions on foreign holdings in some sectors, virtually all sectors in Singapore, except a few like residential property, are completely open to FDI.

Singapore firms like SingTel, Singapore Airlines and venture capital firm Temasek are extremely strong in their respective businesses and are eyeing a bigger presence in the rapidly growing Indian market.

Around 60 per cent of Singapore's outward investment goes into financial services and only 15 per cent goes into manufacturing. The other important sectors where Singapore-based firms invest include commerce, real estate and business services.

Also, there is virtually no restraint on outward foreign investment, which is promoted through tax exemption and non-tax incentives such as finance programmes.

A major share of FDI inflow into Singapore goes into sectors such as financial and insurance services (over 40 per cent) and manufacturing (35 per cent). FDI inflows into Singapore are on the rise as the city-nation provides a number of incentives to foreign investors, including tax holidays, tariff concessions and exemption of taxable income on new fixed investments.

Bilateral trade between the two countries has also been on the rise in the past decade. According to studies, the total bilateral merchandise trade between the two countries tripled during 1991-2002, reaching $4.2 billion. Bilateral services trade increased 40 per cent from 1998 to $0.74 billion in 2000. Singapore emerged as the eighth largest foreign investor in India in 2002.