New norms render FDI cap meaningless
By siliconindia   |   Thursday, 12 February 2009, 17:45 IST   |    1 Comments
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New norms render FDI cap meaningless
New Delhi: The new FDI (Foreign Direct Investment) norms announced by India's cabinet has rendered FDI cap, which exists in some sensitive sectors, totally meaningless. The government has relaxed norms governing what constitutes foreign equity in companies that operate in sectors that have a cap on overseas investment in a bid to rationalize procedures. Under the existing norms, if a firm with 40 percent foreign equity and 60 percent Indian equity had invested Rs 100 crore in another firm, Rs 40 crore of this amount would be treated as FDI. Now, under the revised norms passed by the Cabinet on Wednesday, it will be treated as zero FDI. Explaining the new norm, Home Minister P. Chidambaram said, "Though foreign investment in a domestic holding company would be considered foreign equity, the domestic holding company's foreign equity component in another company will not be taken into account while calculating the sector-specific foreign equity limit, if the holding firm is majority-owned and controlled by Indians." "The objective is to make the norms simple and transparent," Chidambaram added, while briefing reporters on decisions taken by the cabinet meeting, presided over by External Affairs Minister Pranab Mukherjee who also headed the ministerial group. The home minister said that while the definition of "owned" and "controlled" would be clearly defined, he also said that government permission would be required for foreign investment in areas like defence and air transport. "But these rules will not apply were there are no sectoral caps - where 100 percent foreign equity is allowed." As of now, the ceiling on foreign investment in a company was being worked out on the basis of both the direct stake of the foreign partner plus the pro-rata foreign direct investment in the equity of the domestic partner. But the ministry of commerce and industry, as also several stakeholders, had wanted these norms recast since it was causing complications and being subject to misuse in sectors such as telecommunications and media.

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