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Foreign investment distinctions set to go
BS Reporter in New Delhi
 
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February 16, 2009 10:48 IST
The government has decided to do away with the various classifications of foreign investments for the purpose of calculating foreign investment in downstream companies.

Thus, foreign direct investment, foreign institutional investment (as on March 31), investments by non-resident Indians, money raised from American depository receipts, global depository receipts, foreign currency convertible bonds, convertible preference shares as well as currency debentures will all now be lumped together as foreign investment.

In one stroke, the move will raise the level of foreign investment in a score of Indian companies and thereby crimp their ability to raise resources from overseas investors, especially in sectors with foreign investment caps. It will also allow overseas firms entry into restricted sectors like multi-brand retail and increase their exposures in sectors like the media where there is a limit on foreign investment.

The government has prepared a Press Note to this effect, which is likely to be released shortly.

At present, some sectors differentiate between foreign direct investment and foreign institutional investment while computing foreign investment. Sectors like banking and direct-to-home broadcast services take into account both forms while calculating the foreign investment.

But in sectors like asset reconstruction, only foreign direct investment is included. Under the new norms, all forms of overseas investments will be included while computing the foreign investment.

The Press Note specifies that downstream investments by Indian companies in which Indian residents have more than 51 per cent as well as the power to appoint a majority of the board will not fall under the new guidelines.

"If the company is owned and controlled by Indians, then the downstream investments will not be counted as having any foreign investment. Therefore, the sector cap issue should not arise," said PricewaterhouseCoopers Executive Director Ketan Dalal.

Some experts said there are grey areas in the Press Note, which need to be addressed. One, what about investments made by a company which is a 50:50 joint venture between an Indian and a foreign company? Two, what happens when the majority Indian stake is disbursed amongst several shareholders and it is not clear who has the right to appoint directors? "There should be clarity in these matters," said an investment analyst who did not wish to be named.

The Press Note also does away with the norm of calculating foreign investment in a downstream company on a pro-rata basis.

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