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This will bring more FDI to India…
Fri, 1 Apr Pre-Open

FDI in India has been poor. During the 11-month period from April 2010 to February 2011, FDI inflows into economy declined by 25% YoY to US$18.3 bn. During January and February this year, FDI has fallen by 49% and 30% respectively, on a year-on-year basis. .

This is indeed something to worry about. The fact is that India is a very lucrative market to invest in. There is a lot of money just waiting to pour in. But investors are shy to come in. Why? That’s mainly because of the hordes of regulatory hurdles and restrictions.

This has obviously made policymakers uneasy. So the government has now liberalised the FDI policy to some extent. The following are broadly the new changes:

  • The hitherto policy allowed for conversion of only external commercial borrowings, fees or royalty to be converted into equity. Now Indian companies have been allowed to issue equity to overseas firms against import of capital goods and machinery. This will make it easier for Indian companies to raise foreign capital.
  • The government has also loosened up the agriculture sector. 100% FDI will now be permitted in the development and production of seeds and planting material, floriculture, horticulture, and cultivation of vegetables & mushrooms under controlled conditions. Besides, animal husbandry, pisciculture, aquaculture under controlled conditions, services related to agro and allied sectors have also been allowed 100% FDI. The tea sector, as well, will be a beneficiary of 100% FDI.
  • The FDI guidelines have been comprehensively simplified and rationalised. Companies have now been classified into only two categories - 'companies owned or controlled by foreign investors' and 'companies owned and controlled by Indian residents'. The earlier categorization of 'investing companies', 'operating companies' and 'investing-cum-operating companies' has been done away with. This would have a bearing on companies with majority foreign equity as they would now be classified as foreign companies.
  • The government has also removed the restrictive condition of obtaining prior approval of Indian companies for making investments in the 'same field'. This will promote an atmosphere of competition and thus attract higher FDI and technology inflows.
We believe this is a move in the right direction. While the new policy will definitely attract more FDI, it will also plug the loopholes for back door FDI entry.

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