JOIN USOverseas fund tap for firms is eased
But at the same time the government introduced new guidelines for defining exact status of investing companies to plug loopholes for back door FDI entry breaching caps prescribed in various segments of the economy.
As per the third Consolidated FDI Policy Circular — a comprehensive reference guidebook on foreign investment-related regulations — Indian firms will now be allowed to directly source FDI through issuance of equity to overseas firms against imported capital goods and machinery. The facility of conversion of capital goods import into equity was earlier available for companies raising external commercial borrowings (ECBs). “After stakeholder consultations, the government has now decided to permit issue of equity, under the government route, in... import of capital goods/ machinery/ equipment (including second-hand machinery),” the Department of Industrial Policy and Promotion (DIPP) said while releasing the third Consolidated FDI Policy Circular.
This measure, which liberalizes the conditions for conversion of non-cash items into equity, is expected to significantly boost the prospects for foreign companies doing business in India, DIPP officials said. Significantly, the government also liberalized the norms for overseas investment in production and developments of seeds. As per the circular FDI will now be permitted in the development and production of seeds and planting material without the stipulation of having to do so under “controlled conditions”.
The government also decided to abolish the condition of prior approval in case of existing joint ventures and technical collaborations in the “same field”. “It is expected that this measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country,” the DIPP said. In a bid to prevent backdoor entry of FDI into such segments where FDI limit has been prescribed, the government significantly classified companies into two distinct categories – “companies owned or controlled by foreign investors” and “companies owned and controlled by Indian investors”.
Currently for FDI calculation purpose there are three categorization—“investing companies”, “operating companies” and “investing-cum-operating companies”. The new categorization guideline would have a bearing on the companies with majority foreign equity as they would now be classified as foreign companies.
As per the new FDI circular companies would now be free to prescribe a formula for transforming convertible instruments (like debentures, partly paid shares, preferential shares etc) into equity in accordance with the guidelines of Fema and Sebi. Earlier, they were required to specify upfront the price of convertible instruments. This decision will help the recipient companies in obtaining a better valuation based upon their performance, the DIPP said.