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India, FDI Rules in for Major Overhaul

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  • S Rengasamy
    Please find below information to delink FII investment in certain cases in India. The Indian Government has proposed extensive changes in the guidelines for
    Message 1 of 1 , Nov 9, 2008
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      Please find below information to delink FII investment in
      certain cases in India.

      The Indian Government has proposed extensive changes in the
      guidelines for foreign direct investment (FDI) that could
      impact a range of industries such as telecom,infrastructure,
      real estate and broadcasting.

      The changes include such measures as including investments
      by non-resident entities in sectoral limits, removing
      foreign institutional investment (FII) towards calculating
      sectoral equity limits with caveats and withdrawing key
      norms in Press Notes 3(1997) and 9 (1999) on 100 per cent
      foreign holding companies and their downstream investments.

      These proposals were part of a note prepared by the
      commerce ministry and discussed by the Cabinet committee.
      They are aimed at liberalising the FDI regime not only to
      attract more foreign investment against the background of
      a global liquidity crisis but to standardise procedures
      across various sectors.

      The relaxations will apply to those sectors that have
      composite limits (FDI plus FII) and for which there are
      no separate statutes or rules that specifically govern FDI.

      If the new norms are cleared, companies will get six months
      to comply. The note suggests that the changes be
      implemented in phases.

      The first phase, which was discussed recently, will
      finalise methods for calculating direct and indirect
      foreign equity in Indian companies.

      This includes counting investments by non-resident
      entities(non-resident Indians and Overseas Corporate
      Bodies) directly in an Indian company as FDI. NRI
      investments currently do not figure in the sectoral
      FDI limits.

      Streamlining FDI (Phase I)

      * Investment by Indian companies in which foreign firms
      have beneficial investment will be counted as direct FDI

      * Indirect foreign investment through an investing Indian
      company would not be considered for the calculation of
      foreign investment if the Indian company is 'owned' and
      controlled by resident Indian citizens

      * Direct investments by non-resident entities to be
      counted as FDI

      Phase II

      * Investments by FIIs not to be counted towards sectoral
      equity cap

      * Removal of Press Note 3 (1997) and Press Note 9 (1999)
      meant for 100% holding companies.

      According to the proposed guidelines, if a company based
      in India declares that a foreign firm has a "beneficial
      interest" in it, any investment made by the Indian company
      in another domestic firm will be considered FDI.

      Indirect foreign investment through an investing company
      would not be considered in calculating foreign investment
      if it is controlled and owned by resident Indian citizens.
      This will apply if 50 per cent of the company is "owned"
      by a resident Indian citizen or the resident Indian has
      the power to name a majority of board directors in the

      In the second phase the government will consider the issue
      of excluding FII investment in calculating sectoral limits,
      but a deadline has not been given. This adjustment has been
      widely demanded by domestic and foreign investors.

      The move will be a major plus for telecom companies many of
      which are close to their 74 per cent equity FDI cap because
      of FII investments.

      Some exceptions, however, remain such as if the FIIs
      choose to invest under the FDI scheme or when they submit
      a declaration that they are acting in concert with any of
      the companies that have invested in the Indian company.

      To simplify procedures, the government has proposed
      withdrawing Press Notes 3 and 9.

      Press Note 3 of 1997 specifies that a foreign company will
      have to secure Foreign Investment Promotion Board (FIPB)
      approval to set up holding companies in India.

      Press Note 9 of 1999 relaxed the conditions for setting up
      holding companies and said foreign-owned Indian firms need
      not take FIPB permission to make downstream investments in
      sectors open to foreign investment.

      The note said these notifications would lose their relevance
      once the new norms for direct and indirect foreign equity
      in an Indian company come into force.

      Thanking you with best regards,


      Yours in MAICCI,

      S. Rengasamy
      (Hon. Secretary General, MAICCI)
      Email: srsamy@...

      Malaysian Associated Indian Chambers of Commerce & Industry
      Megan Avenue II, B-9-1, (Block B, 9th Floor, Unit 1)
      No. 12 Jalan Yap Kwan Seng
      50450 Kuala Lumpur

      Tel: 6 03 2171 2616
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