Govt. to tighten the grip on FDI inflows
The government is considering various proposals to redraft the Foreign Direct Investment (FDI) norms to plug the existing loopholes. Presently there are sectoral caps for various sectors for FDI in India. These limits are maily in the form of caps by way of equity or share capital. Now, the want to include indirect holding of foregn entities in Indian companies as well as the definition of indirect holding. But these changes will be prospective and will not applicable to existing investments.
It is likely that interest-free loans given by the foreign partner (or loans for which it has stood guarantee) to the Indian partner for investing in the joint venture (JV) as well as fully convertible preference shares issued to the foreign partner will be treated as indirect foreign holding and will come within the purview of the FDI sectoral cap. In addition, if the foreign investor has an equity stake in a domestic company which, in turn, holds shares in the JV, the loans advanced by the domestic company to the JV will also be considered as indirect holding.
If these proposals are implemented, it could have sweeping effect on sectors such as retail, insurance, aviation, defence and stock-broking where there are FDI sectoral caps. At the moment, there are four distinct FDI slabs — ranging from 100% to a complete bar in some sectors. The telecom sector has a 74% sectoral cap, the aviation sector has a 49% sectoral cap, and the insurance sector has a 40% sectoral cap.
These moves to tighten the FDI guidelines come in the wake of controversy sorrounding the Hutchison Essar shareholding, while acquired by the Vodafone.
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