New FDI rules face scrutiny

Barely two months after the government announced major changes in foreign direct investment (FDI) norms, the Reserve Bank of India (RBI) and the Finance Ministry have sought a comprehensive review of the new guidelines on several contentious issues cutting across sectors that include banking, financial services, insurance, real estate, infrastructure and airlines.

The ministry fears that the new guidelines could open up the floodgates for foreign investment in several sensitive sectors including gambling, agricultural plantations and multi-brand retail, where FDI is currently prohibited.

The new norms —specified under the government’s Press Notes 2, 3 and 4, 2009---state that an entity that is controlled and owned by an Indian with less than 50 per cent foreign investment can invest downstream in any sector.

In an internal note on the recent changes in FDI policy, a copy of which is available with the Hindustan Times, the ministry has expressed fears that in “one sweep any sectoral gap of 49 per cent and below has become meaningless.”

“Whether this stance has been approved as such or is it an unintended liberalisation is not clear,” the note stated.

The ministry also wants a method to be built in where violation of sectoral caps can be detected through a standard filing system either with the RBI or any sector regulator.

“For downward investment, there is no filing at all done or mandated with the RBI and therefore no violation can be detected,” the note said.

While the new norms have been specified and approved by the Cabinet, these will find legal sanctity only after they are notified under the Foreign Exchange Management Act (Fema). The ministry says contentious issues must be clarified before the notification is issued.

In a recent letter to the government, the RBI has also echoed similar opinion. It said under the new norms many private banks may turn “foreign owned (though Indian controlled).”

Among the affected banks are ING Vysya, ICICI Bank, Development Credit Bank, Yes Bank, IndusInd Bank, Federal Bank and HDFC Bank.

“This will have implications not only on the business model of the banks but also for the investee companies,” it said. So far there are only two categories of banks-- Indian banks and foreign banks. There are separate norms on priority sector lending, market access etc for the two categories.

A new hybrid category would create difficulty in compliance with minimum capitalisation norms. Moreover, in the insurance sector, where FDI is capped at 26 per cent, needs more clarity and uniformity, the RBI has said.

The RBI is also against inclusion of foreign currency convertible bonds (FCCBs) as foreign investment as this could lead to ambiguities because bonds are treated as borrowings until conversion into shares.