October 2010
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Government eases Foreign Direct Investment norms

New Delhi: The Government has eased the foreign direct investment (FDI) norms for sectors including wholesale cash-and-carry trading, non-banking finance companies (NBFCs) and certain other segments, besides bringing about procedural simplifications.

The Consolidated Foreign Direct Investment (FDI) Policy comes in effective from October 1, 2010.

In case of non-banking finance companies (NBFCs), the government has decided to ease the norms for downstream investment. It has said NBFCs with 100 per cent foreign investment and a minimum capitalisation of US$ 50 million, can set up subsidiaries for specific NBFC activities, without bringing additional capital towards minimum capitalisation.

Furthermore, the foreign players with interest in the wholesale cash-and-carry segment, the government has decided to remove the restriction on internal use. It, however, retained the ceiling, mandating that such companies could at best sell up to 25 per cent of their turnover to group companies. The move would have implications on several retailers like Bharti-Walmart, Carrefour and Metro Cash and Carry.

Additionally, the share-swap arrangements have been brought under the ambit of the FDI Policy for the first time. The statement said this had been included as there were a large number of proposals from companies. It has been mandated that the valuation of the shares would have to be made by a banker and would be subject to FIPB approval.

Also, the three-year, lock-in criteria in the real estate sector remains the same. Instead, for construction development projects, the Department of Industrial Policy and Promotion (DIPP) has clarified that the lock-in period of three years will be applied from the date of receipt of each tranche of FDI or from the date of completion of minimum capitalisation, whichever is later.

At present, however, 100 per cent FDI is permitted under the automatic route in townships, housing projects, built-up infrastructure and construction development projects. It is, however, subject to a minimum capitalisation requirement of US$ 10 million for wholly-owned subsidiaries and US$ 5 million for joint ventures (JV) with Indian partners. While the original money invested cannot be repatriated before a period of three years from the completion of minimum capitalisation, investors can exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB).

On procedural aspects, the government has said downstream investments through internal accruals are permissible. "This clarity was necessary as the FDI policy says that for the purpose of downstream investment, the operating-cum-investing/investing companies would have to bring in requisite funds from abroad and not leverage funds from the domestic market for such investments. While this would not preclude companies from making downstream investments through 'internal accruals', it had been noticed that, in certain cases, some companies had started accessing the government approval route for downstream investments through internal accruals," an official statement said.

Mr Srini Raju, Managing Director of Peepul Capital, who gave away awards, asked the budding entrepreneurs to project a realistic picture of the company as they approached and signed deals with investors, particularly private equity players

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