Friday, April 4, 2008

Foreign Investment in the Small Scale Sector

The small scale sector has continued to receive protection from the Government when it comes to foreign investment, despite liberalisation pervading in the economy generally. It is time to alter that position, argues an editorial in today’s Financial Express:

“Foreign direct investment (FDI) in small-scale industry (SSI)? It could be just what the sector needs. In fact, the government’s reported move to liberalise FDI here by shifting the approval regime from the case-by-case approach currently used by the FIPB to the automatic route, and by perhaps even raising the industry-specific caps on foreign equity ownership, could boost India’s prospects in the race to secure global capital for its Economy. Foreign money brings with it new expertise, international discipline in the deployment of funds and sometimes even strategic inputs, from which entire market segments tend to benefit. Ideally, of course, the entire SSI list—there are 35 industries still on it reserved for small players—should be scrapped and 100% FDI invited in all manufacturing sectors, big and small, with only a handful of strategic industries kept out of foreign control. But if the proposed FDI-in-SSI move has the effect of impressing upon our reservationists the value of foreign inputs, then maybe this is a clever way to pry open the sector for bigger and better things to come.”
Perhaps there is merit in reviewing the current approach of the Government.


Rahul Moghe said...

The MSMED Act has classified enterprises as micro, small or medium based on their investment in plant and machinery. There doesn't seem any other criteria for classification, nor do there seem to be any exeptions.

Can a 100% Wholly Owned Subsidiary (WOS) of a foreign company be categorised as Small or Medium Scale based on the investment of the WOS in plant and machinery? Put differently, is there any provision of the law, or any other law, that prevents a WOS of a foreign company from being recognised as small or medium?

Umakanth Varottil said...

Rahul, there is a list of industries that are reserved for the small scale sector. Please see para. 2.3 of the FDI Manual ( Foreign investment in small-scale units is available only up to 24%. Hence, in your example of the wholly-owned subsidiary, the company may cease to be entitled to small-scale status as the foreign investment exceeds 24%. See para. 1.25 of the FDI Manual.