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NEW GOVT MAY MAKE CHANGES IN FII CALCULATION NORMS
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NEW GOVT MAY MAKE CHANGES IN FII CALCULATION NORMS
One of the big challenges facing the new government will be to reconsider the norms it announced earlier this year for computing foreign ownership, an issue on which it has drawn criticism.
The guidelines, announced in February, said that investment through companies owned and controlled by Indians would not count in the calculation of foreign investment. This meant that despite foreign ownership of as much as 49 percent, investments by such companies in key sectors where foreign participation is capped would not be counted as foreign investment.
Approved by the Cabinet, the norms have been opposed by the Reserve Bank of India and the department of economic affairs, which are of the view that it would result in the violation of limits on foreign investment in sectors such as retail, media and defence.
Another sticking point with the guidelines is that investments by companies, which are majority foreign-owned, are counted as foreign investment. This has put banks such as the majority foreign-owned ICICI Bank in a fix. Suddenly, India’s largest private sector lender finds that the investments it has made in areas such as insurance–the foreign investment limit here is 26 percent—have been classified as foreign investment.
Faced with such serious obstacles, the new government may have to make serious changes in the foreign investment calculation norms it has announced or overhaul the entire policy after gauging the general level of discontentment.
The government will have to take cognisance of the concerns of RBI, which has the final say by notifying the guidelines. The central bank will not want to allow foreign investment to travel a circuitous route and enter sectors where it is not allowed. Under the February guidelines, an Indian company with minority foreign stake may well invest in a multi-brand retailer such as Big Bazaar or Spencer’s even though rules prohibit it.
Similarly, other sectors such as agriculture and nuclear energy will cease to be banned destinations for foreigners. If the new government decides to keep banks out of the ambit of the new guidelines, foreign investment in banks would be directly governed by the RBI.
The other major issue, which will need attention, is the requirement for mandatory government approval for investment in sectors with foreign investment limits. Under the guidelines announced earlier this year, the Foreign Investment Promotion Board has to give its nod for investments in the telecom and aviation sectors, a procedure which could add to delays.
The future government will also have decide if foreign investment should be allowed in multi-brand retail, something which the outgoing government could not decide on.
Source:
http://Rajat Guha, New Delhi, May 18, 2009, The Economic Times
The guidelines, announced in February, said that investment through companies owned and controlled by Indians would not count in the calculation of foreign investment. This meant that despite foreign ownership of as much as 49 percent, investments by such companies in key sectors where foreign participation is capped would not be counted as foreign investment.
Approved by the Cabinet, the norms have been opposed by the Reserve Bank of India and the department of economic affairs, which are of the view that it would result in the violation of limits on foreign investment in sectors such as retail, media and defence.
Another sticking point with the guidelines is that investments by companies, which are majority foreign-owned, are counted as foreign investment. This has put banks such as the majority foreign-owned ICICI Bank in a fix. Suddenly, India’s largest private sector lender finds that the investments it has made in areas such as insurance–the foreign investment limit here is 26 percent—have been classified as foreign investment.
Faced with such serious obstacles, the new government may have to make serious changes in the foreign investment calculation norms it has announced or overhaul the entire policy after gauging the general level of discontentment.
The government will have to take cognisance of the concerns of RBI, which has the final say by notifying the guidelines. The central bank will not want to allow foreign investment to travel a circuitous route and enter sectors where it is not allowed. Under the February guidelines, an Indian company with minority foreign stake may well invest in a multi-brand retailer such as Big Bazaar or Spencer’s even though rules prohibit it.
Similarly, other sectors such as agriculture and nuclear energy will cease to be banned destinations for foreigners. If the new government decides to keep banks out of the ambit of the new guidelines, foreign investment in banks would be directly governed by the RBI.
The other major issue, which will need attention, is the requirement for mandatory government approval for investment in sectors with foreign investment limits. Under the guidelines announced earlier this year, the Foreign Investment Promotion Board has to give its nod for investments in the telecom and aviation sectors, a procedure which could add to delays.
The future government will also have decide if foreign investment should be allowed in multi-brand retail, something which the outgoing government could not decide on.
Source:
http://Rajat Guha, New Delhi, May 18, 2009, The Economic Times
