Violation of FDI norms forces review of Press Notes 2, 3, 4: report

The government is reported to be in the process of reviewing its controversial new foreign investment policy, announced through Press Notes 2, 3 and 4 a few weeks ago, in order to close loopholes that allow companies jump foreign direct investment (FDI) ceilings in various sectors.
 
The government had, in February, issued the controversial press notes 2,3 and 4 in a bid to simplify the method for calculating FDI. The press note had clearly stated that as long as Indian promoters hold a majority stake (that is, 51 per cent or more) in an operating-cum-investment company it would be considered Indian-owned and it does not matter FDI in the company exceeds the ceiling through cross holdings.

Such companies would be treated as Indian companies and allowed to invest in any other joint venture company or companies that operate in other sectors with sectoral caps on FDI.

The current review comes after instances of misuse of the provisions came to light. Retailer Pantaloon and media house UTV are reported to have restructured their operations in order to circumvent foreign investment limits in the wake of the new FDI guidelines.

The two are reported to have invested in step-down joint ventures in multi-brand retailing where FDI is prohibited and in media where FDI is capped at 26 per cent.

While these investments are clear violations of the government's intended FDI policy, these would not have been possible under the earlier FDI guidelines.
 
In both cases, the government would not have permitted these investments under the earlier FDI guidelines. A revision of the controversial press notes would mar prospects of both these proposals.

The Reserve Bank and the finance ministry's department of economic affairs had raised serious objections over the press notes, with the RBI raising the possibility that firms may use the new guidelines to ''circumvent the definition of ownership and control by downstream investment'' in sectors in where FDI is prohibited or are limited to a minority holding.

The revision is likely to restore the earlier position of beneficial interest to calculate the level of foreign holding in an Indian company. Also, the government is likely to issue a clarification to the effect that the press notes do not apply to banking sector investments.