FIPB nod required for downstream projects

In a distinct shift in its FDI policy, the government now requires companies with less than 50 per cent foreign equity to route all downstream investments through the FIPB board as against its earlier policy.

This means significant dilution of a series of Press Notes issued by the Ministry of Commerce and Industry last year, which redefined the country’s FDI policy.

Press Notes 2 to 4 had deemed firms that had less than 50 per cent foreign ownership and where the control was in Indian hands as ‘Indian’ companies. Such companies were permitted to make downstream investments even where there were sectoral caps on FDI, without seeking clearance from FIPB. The notes defined “control” as the power to appoint majority of the directors on the company’s board.

This policy, however, came under sharp criticism from the Reserve Bank of India and some departments in the finance ministry, which said the policy could be manipulated by foreign companies to make a backdoor entry into India. They said it allowed foreign companies to make investments through their Indian units into sectors where FDI was restricted, as in multi-brand retail where FDI is banned.

These issues came up for a debate in a meeting last month between FIPB, RBI and the departments of legal affairs, financial services, economic affairs, and industrial policy and promotion.

The meeting, which took place following a directive from Finance Minister Pranab Mukherjee, reached a consensus to impose checks on downstream investments by companies with less than 50 per cent foreign equity and were under Indian control.

This means that such companies would now have to approach FIPB for clearance if they wished to make an investment in, say, defence, a sector where foreign investment cannot be more than 26 per cent.
They, however, can make downstream investment, without FIPB clearance in areas where 100 per cent FDI is on the automatic approval route.

The consensus offers a mid-way path. It is better than the earlier policy where all downstream projects, even if they were under the automatic route, had to go to FIPB.

In the meeting, RBI suggested that for an Indian controlled and owned company subsequent approval of downstream investment should be made mandatory. The FIPB representative also agreed that for any company, Indian or foreign controlled, which had more than 50 per cent FDI, FIPB clearance should be mandatory. The infrastructure and investment division of the Department of Economic Affairs also opined that as “control” was not clearly defined, all downstream investments by Indian-owned and controlled companies with less than 50 per cent FDI should be on a “case by case basis.”

It was argued that foreign-owned and controlled companies were required to inform FIPB on the various agreements signed between shareholders, but there was no such “oversight” system for Indian owned and controlled companies. RBI was of the opinion that the task should be undertaken by the administrative ministry. But other representatives argued that since there was just one time approval required by the Indian controlled companies, the administrative ministries had no legal authority to control their downstream investments.

However, the lone contrarian view came from DIPP, which argued that as long as the control was Indian, the company should be allowed to make downstream investments in all sectors.