FDI regulations for companies over 50% foreign shares on Foreign Investment in India

The Indian government may ask companies that have less than 50% foreign equity to request approval from Foreign Investment Promotion Board before making any downstream investment. This new proposed regulation policy on foreign investments in India has been agreed on by the major stakeholders in India’s FDI regime. The regulation aims at putting such investments by these companies into areas where Caps on FDI are in place or places in which there are no automatic routes. Such investments would be done through the FIPB. As a result, it is expected that the series of Press Notes potential investors get from the Commerce Ministry will be reduced. India’s FDI regulations were redefined last year by the Ministry.


The government had issued policy Press notes 2 to 4 that defined foreign companies with over50% share Indian owned as “Indian companies.” In this arrangement, these companies were allowed to have downstream investments regardless of whether there were sectoral Caps on FDI without having to seek the approval of the FIPB. Further more, control of firms had been defined as the power to appoint a majority of a firm’s directors in a company’s board. This policy on foreign investments in India was met by criticisms from the Reserve Bank of India. Companies could manipulate it to make entry into India. Foreign companies can choose to make investments in the said sectors through their Indian units disregarding FDI restrictions. FDI in India is banned in multi-brand retail.


The agreement to impose checks on downstream investments by companies with less than 50 percent foreign equity that are under Indian control is so far India’s latest FDI regulation. What this means is that; if such a company wants to say, make an investment in the defense sector, it would have to go through the FIPB first for consent. That does not include the fact that in all sectors, there are regulations that are to be met for investments regardless. For instance, a defense investment cannot exceed 26% according to regulations on foreign investments in Indian.


Even so, such companies facing this restriction will be allowed to make downstream investments in areas that have 100 percent FDI automatic approval route without having to seek the FIPB’s approval. In addition, the Indian Reserve Bank proposed that Indian companies’ subsequent downstream investments should be made mandatory. However, investors are worried over the control mechanism proposed as the regulation does not work out clearly.


10 May 2010