Thursday, September 30, 2010

A New Edition of the Consolidated FDI Policy

On April 1 this year, the Government gave effect to a consolidation exercise by locating all policies relating to FDI in a single document known as the Consolidated FDI Policy (as discussed here). That was not meant to be a static policy, but something that was to be reviewed every six months.

Lo and behold, promptly at the end of the first six-month period, the Government today issued a revised FDI policy in the form of the Consolidated FDI Policy: Circular No. 2 of 2010. The policy is usefully accompanied by a press release explaining the key changes. There is no significant change in the direction of the policy, either generally or with respect to any particular industrial sector, although several open issues causing ambiguities in practice have been ironed out in the new circular. Some of the more important clarifications relate to the following (although this list is not exhaustive):
- Clarification that 100% foreign owned NBFCs, with a minimum capitalization of $ 50 million, can set up subsidiaries for specific NBFC activities, without bringing additional capital towards minimum capitalization;

- Introduction of specific provision for downstream investment through internal accruals;

- Clarification of the terms ‘original investment’ and ‘lock-in period’ in case of minimum capitalization of construction development projects;

- Removal of the condition that ‘wholesale trading made to Group companies should be for internal use only’ in the guidelines for Cash & Carry Wholesale Trading;

- Clarification that Minimum Capitalization includes share premium received along with face value of the shares only when it is received by the company upon issue of the shares to the non-resident investors;

- Amendment of Note below the definition of ‘Capital’ to allow for FDI in partly-paid shares and warrants through the Government route;

- Changes in the paragraphs relating to issue price of shares and addition of a paragraph on share-swaps, consistent with extant instructions.
Continuing with the general observations made in my post yesterday regarding the nature of policy making in the FDI arena, the exercise involving consolidation of the FDI policy and its periodic revision (developments that occurred over the last year or so) have certainly streamlined matters. Previously, any attempt at ascertaining a specific rule on foreign investment was like looking for a needle in a haystack. To that extent, the present efforts go a long way in inducing a sense of orderliness to the process, creating a greater level of certainty and comfort for foreign investors as well as Indian companies (who are recipients of the investment). Of course, there will still be areas of ambiguities and confusion, but as long as they are addressed from time to time, progress will be made.

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