The government is likely to significantly alter the controversial Press Notes 2, 3 and 4 in a couple of weeks to close loopholes that give firms leeway to exceed limits on foreign direct investment in various sectors.
The press notes, issued in February this year, simplified the method for calculating FDI and broadly stated that as long as Indian promoters hold a majority stake (that is, more than 51 per cent) in an operating-cum-investment company, they can bring in investments up to 49.9 per cent through FDI.
This company would be treated as an Indian company and can invest through a joint venture in any other company that may be operate in sectors in which there are limits on FDI participation.
After the press notes were issued by the commerce and industry ministry, the RBI and the finance ministry's department of economic affairs had raised serious objections. The RBI has said the press notes raised the possibility of 'circumventing the definition of ownership and control by downstream investment' in sectors in which FDI is prohibited or government approval is required or sectoral caps are in place.
Soon after the press notes were issued, companies like retailer Pantaloon and media house UTV restructured their organisations to raise FDI in their businesses through step-down joint ventures. FDI is prohibited in multi-brand retail and is restricted to 26 per cent for media.
In both cases, these investments would not have been permitted under earlier FDI guidelines. Once the February press notes are revised, neither of these two proposals is likely to go through.
Before the February press notes were issued, all FDI was calculated on the basis of beneficial interest and this position is likely to be restored.
"Any operating-cum-investment company even with less than 50 per cent FDI would not be allowed to invest in step-down subsidiaries that are engaged in restricted categories such as retail," sources said.
The commerce ministry also faced some embarrassment when it transpired that the press notes inadvertently classified ICICI Bank and HDFC Ltd as "foreign owned" owing to their combined foreign institutional investor (FII) and FDI holdings of 65 and 74 per cent respectively. This, in turn, would have impacted these institutions' downstream investments in insurance, which now violated the 26 per cent FDI limit in insurance.
Industry ministry sources then said a clarification would be issued to say the new press notes did not apply to the banking sector. The industry ministry has already begun consultations with the RBI and the finance ministry on the issue.
Press Notes 2, 3 and 4 also included portfolio investment (through FIIs) in the total FDI limits. This is likely to be changed to the earlier position in which FII and FDI were distinct. Once this happens, ICICI Bank, HDFC Ltd and Max India (in which FDI and FII investments stand at 53 per cent), to use some examples, will revert to being categorised as Indian-owned companies.
