The Union Ministry of Finance has decided to shut the route that allowed firms with up to 49 per cent FDI to make downstream investments in sectors where FDI is prohibited, like multi-brand retail, agriculture, lottery and atomic energy.

The ministry has asked the DIPP to issue a clarification. The change will be subsumed in the new consolidated FDI policy.

The new norm aims at discouraging such Indian companies from applying for investing in a sector where FDI is disallowed. Many such pleas have come up before the FIPB, but the board has been indecisive on them.

The ministry opines that given the changed scenario, allowing FDI through the backdoor in these sensitive sectors could be a risk that outweighs the benefit of any additional investment it could lead to.

The controversy kicked off by Press Notes 2 and 3 on computing foreign investment has persuaded the government to make fresh amendments to the norms.

Under PN 2 and 3 of 2009, if a company is owned and controlled by Indians, any foreign investment in it will not come in the way of it making investment in sectors where foreign investment is proscribed. Under this, if foreign holding in a company is less than 50 per cent, it will be deemed as Indian owned. If it has majority Indian directors on its board, it will be considered as controlled by Indians. So, even if foreign holding in a company is up to 49 per cent, its investment in another downstream subsidiary will be termed as domestic investment. The company will be treated as an Indian company and can invest in sectors like multi-brand retail and agriculture, which have not been thrown open to FDI.

In a related development, the ministry has banned FDI in cigarette manufacturing in India.

Also See:

23 FDI proposals cleared (29-March-10)