Norms for FDI on the anvil

New Delhi: The Foreign Investment Promotion Board is planning to fix minimum capitalisation norms for allowing foreign direct investment (FDI) into the country, reliable sources say.

This is to encourage and inculcate commitment on the part of foreign investors towards the venture they propose to set up and not to get into frivolous activities. Though the policy is still within the realms of discussion, the sources say a broad consensus seems to have been reached on at least two sectors - knowledge-based industries at $0.5 million, and manufacturing at $100 million.

Whatever the case may be, the FIPB has started insisting that companies willing to invest money in India must at least comply with the minimum requirements set up in the Companies Act. Under the Act, a private limited company needs to invest a minimum of Rs 1 lakh in terms of capital and a public limited, at least Rs 5 lakh. Minimum capital investment norms are followed in countries like China and Chile.

The need for fixing minimum capital norms has been felt by South Block mandarins for quite some time now, especially after the influx of foreign information technology companies into India. Many of these companies came in and set up bases with very little investment on account of two reasons: 1) Setting up IT-base as such does not require too much of investment in terms of capital and; 2) Many of these companies have been largely oriented towards trading activities -buying and selling readymade products from the market instead of carrying on original manufacturing work.

Since all foreign investment applications have to be considered by the FIPB, a lot of time, energy and money are lost in processing such applications. The sources gave examples of two such applications, which involved capital of as little as Rs 200 and Rs 2,000 respectively. Both these applicants wanted to transfer their stake to foreign companies, which would then have converted their holdings into foreign currencies.

Though minimum capitalisation norms do exist in some sectors - like automobile ($50 million) and non-banking finance companies ($5 million) for 49 per cent ownership -these limits are often waived. It is often left to the discretion of the foreign investor, who makes a call depending upon the size and the nature of the venture.