Government tightens investment norms for ‘Indian’ companies

The government may soon ask companies with less than 50 per cent foreign equity to seek approval of the Foreign Investment Promotion Board (FIPB) to make any downstream investment in sensitive sectors.

According to a report, key stakeholders in the country's foreign direct investment (FDI) regime have agreed on a proposal to route all investments by such companies through FIPB in sectors where caps on FDI are in place or where they are not on automatic route.

This would result in significant dilution of a series of Press Notes issued by the ministry of commerce and industry last year, which redefined the country's FDI policy.

Press Notes 2 to 4 had deemed firms that had less than 50 per cent foreign ownership and where the control was in Indian hands as 'Indian' companies.

Such companies were permitted to make downstream investments even where there were sectoral caps on FDI, without seeking clearance from FIPB. The notes defined ''control'' as the power to appoint majority of the directors on the company's board.

This policy, however, came under sharp criticism from the Reserve Bank of India and some departments in the finance ministry, which said the policy could be manipulated by foreign companies to make a backdoor entry into India.