Press Note 1 scrapped to boost FDI

The revised foreign direct investment FDI policy,the govt axed the contentious Press Note 1.

In its third review of the foreign direct investment FDI policy,the government on Thursday took a number of measures to increase foreign funds flow into India. The major relaxations were the scrapping of the contentious Press Note 1 of 2005,flexibility for Indian companies to raise overseas capital,and liberalising foreign investments for production and development of seeds. While making these relaxations,the new policy has also plugged a major loophole by classifying companies into two categories those owned or controlled by foreign investors and those owned and controlled by Indian investors.

FE was the first to report on most of these expected changes,which will help the country to attract more FDI. During April-February 2011,FDI inflows into India declined by 25 over the previous year to 18.3 billion.

The scrapping of the contentious Press Note 1 will enable foreign companies to enter into joint venture agreements with Indian companies or go solo in similar lines of businesses even if they have existing JVs with Indian companies.

Hitherto,for JVs prior to 2005,foreign companies had to seek a no-objection certificate from their Indian partner if they wanted to strike out on their own,which acted as a hindrance. The changes will promote competitiveness of India as an investment destination and will be instrumental in attracting higher levels of FDI and technology inflows into the country, commerce and industry minister Anand Sharma said in a statement. Welcoming the scrapping of the Press Note 1,Upendra Sharma,partner,Jyoti Sagar Associates,said,In the current scenario,with the Indian economy maturing and aiming to be one of the leading economies of the world,continuing with such regulations would have only hampered competition and free growth.

The governments thinking is on the right track and it was high time to do away with PN 1. Policy should not be used as a tool to override the contractually-agreed terms in this era of globalisation. With regard to bringing flexibility for companies to raise funds abroad,the government has permitted issuance of equity to overseas firms against imported capital goods and machinery. After stakeholder consultations,the government has now decided to permit issue of equity,under the government route,in8230;import of capital goods/machinery/equipment including second-hand machinery, the statement said. This measure,which liberalises the conditions for conversion of non-cash items into equity,is expected to significantly boost the prospects for foreign companies doing business in India,it said. Similarly,in the agriculture sector,FDI will now be permitted in the development and production of seeds and planting material without the stipulation of having to do so under controlled conditions.

To plug loopholes,the earlier categorisation of 8216;investing companies8217;,8217;operating companies8217; and 8217;investing-cum-operating companies8217; have been done away with. This will have a bearing on companies with majority foreign equity as they will now be classified as foreign companies. Further,the companies will now be free to prescribe a formula for transforming convertible instruments like debentures,partly paid-up shares,preferential shares,etc into equity in accordance with the guidelines of the Foreign Exchange Management Act and the Securities and Exchange Board of India. Earlier,they were required to specify upfront the price of convertible instruments. The decision will help the recipient companies in obtaining a better valuation based upon their performance.