‘Simple’ FDI norms block flow

Foreign Funds Now Have To Go Through Another Level Of Scrutiny

THE more the government simplifies its norms for foreign investment, the more difficult it becomes for foreign capital to enter India. At least that is the case with the latest Press Notes (2 and 3 of 2009) issued by the Department of Industrial Policy and Promotion. Investment that was permitted under the automatic route in some key sectors will now require clearance by the Foreign Investment Promotion Board and the government, thanks to the new "simplified norms".
    Press Note 3 calls for FIPB/government approval when an Indian company is being set up with foreign equity participation and non-resident control or ownership of that company, in any of the sectors with caps on foreign investment: defence production, air transport services, ground handling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecom and satellites.
    Of these, insurance, banking and air transport were under the automatic route and investment proposals needed only the sectoral regulator's approval. Now, the automatic route is shut, and investment proposals will have to be vetted by the government as well as the sectoral regulator. The new move adds a layer of scrutiny, thereby making the process cumbersome.
    Government approval is also called for when ownership or control of any company in any of these sectors is transferred to a non-resident entity as a "consequence of transfer of shares to nonresident entities through amalgamation, merger or acquisition". "Press Note 3 applies where there exists sectoral cap and transfer of shares from Resident (R) to Non-Resident (NR), resulting into transfer of ownership or control. In such cases, such transfer would require prior FIPB approval," Samir Kanabar, Partner, Ernst & Young, said.
    The approval is needed if an Indian company is being established with foreign investment and is owned by a non-resident entity or controlled by a non-resident entity and control or ownership of an Indian company is being transferred to a non-resident entity.