Govt may put curbs on FDI in financial space

By agencies   |   Friday, 18 August 2006, 07:00 Hrs   |    1 Comments
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NEW DELHI: If the Reserve bank of India's suggestions are followed, foreign investors may no longer be able to take the "automatic route" to step into India's financial services business. Though the present policy provides for 100 percent foreign direct investment (FDI) through the automatic route, subject to minimum capitalization norms for non-banking finance companies (NBFCs) and other approved activities, the RBI has told the government that it is not in favor of FDI coming into the financial sector through that route.

Behind indications of the policy contours on FDI through the automatic route in financial services being re-drawn is the regulator's belief of the necessity of a proper assessment of the entities investing in the financial sector. Currently, overseas investors who fulfill certain norms can invest directly in a local firm or set up a new company in specified sectors, including financial services.

They subsequently report to the RBI, which approves their proposals ex post-facto. In the present system, if the regulator has a problem during the ex post-facto approval, it becomes all the more difficult to unwind such a transaction.

The broad principle underlying this stance is to basically ward off the impact of a collapse of any large entity on the financial sector, especially keeping in mind the fragility of the domestic financial sector, and move towards the stated goal of financial stability.

Presently, neither commodity exchanges not categorized as financial services nor stock exchanges figure in the list of sectors that re-quire the government's prior per-mission for FDI.

It is important to note that some foreign investors have taken the NBFC route to get acquire a stake in the financial services space, as the restriction on FDI in commercial banks is quite stringent.

The RBI has also sought policy clarification on foreign investments in all exchanges. Both the commodity exchanges, MCX and NCDEX, have attracted foreign investment, while BSE has hired investment banks to bring in foreign investors.

What appears as a bone of contention between the government and the regulator is the fact that the automatic route for FDI is also open for transfer of shares from residents to non-residents in financial services, subject to the sectoral policy on overseas investment.

In the context of all the aforementioned issues, RBI wants the government to revisit the policy on FDI in the financial sector.

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