RBI against breach of FDI caps by FIIs

[Sukumar.N]

RBI against breach of FDI caps by FIIs
==============================
NEW DELHI: In a move that has virtually torpedoed the controversial
proposal from the department of industrial policy & promotion (Dipp)
to
allow FIIs to invest beyond sectoral FDI caps, the Reserve Bank has
said that Fema (Foreign Exchange Management Act) does not permit such
flexibility.

The central bank has also rejected the liberal formula proposed for
calculation of indirect foreign equity in Indian companies by stating
that all foreign investment –– including FDI, FII investment, FVCI
(foreign venture capital investment) and NRI investment –– should be
taken into consideration on a ‘pro rata’ basis. The Dipp had suggested
that FDI in holding companies should be taken into consideration for
calculating indirect foreign equity in Indian companies, only if it
exceeded 50%. In holding companies where FDI is below 50%, FDI in
downstream should be treated as nil, according to the proposal.

The finance ministry is also opposed to the proposal and wants to
indirect FDI to be calculated on a pro rata basis, a finance ministry
official, who did not wish to be identified said. However, the
proposals now face the danger of being put on ice. Dipp had sent the
proposals for the consideration of the Cabinet Committee on Economic
Affairs (CCEA), but it is unlikely to get the green signal due to lack
of support from the finance ministry and the RBI. The home ministry
and the defence ministry also have reservations and the liberalisation
now faces rough weather, he said.

The RBI has argued that clearing the proposal would mean allowing 100%
foreign investment in sensitive sectors like telecom though the
sectoral FDI ceiling is 74%. The intent of the government was to keep
26% stake in telecom companies in the hands of Indian citizens,
officials of the apex bank have said. The several other sectors like
civil aviation, single-brand retail, banking and information &
broadcasting would also see effective foreign holding breach the FDI
limits set for these sectors. “The FII cap should be included within
the FDI cap in sectors having composite FDI cap,” a letter from the
RBI to the finance ministry has emphasised.

The apex bank has also said that FEMA regulations do not provide any
mechanism to monitor indirect foreign investment in Indian companies.
This comment is in response to Dipp’s suggestion that FIIs can report
their indirect stake to Indian authorities and commit that stakes
beyond the FDI limit would not entail board representation and
management control.

“All foreign investments (FDI, FII, FVCI, NRI, etc) in an Indian
company, irrespective of the percentage, should be considered for
deciding whether a company is a foreign owned company for the purpose
of determining indirect foreign investment,” says the letter.

Moreover, the finance ministry opposition stems from the fact that it
in favour of adopting a comprehensive view needs on the issue of
allowing FII over an above the FDI cap and calculation of indirect
foreign holding. “The proposal could also lead to an anomalous
situation in certain sectors such as private sector banks could
theoretically have foreign investment up to 100%.

The same situation could arise in respect of sensitive sectors such as
media, insurance, telecommunication, etc. Therefore, foreign
investments should capture the entire investment through various
routes –– FDI, FII, FVCI, PIS (portfolio investment scheme), etc,”
says the communication.

Source : Economic Times