After putting the issue of foreign direct investment in retail trade on the backburner, the government may soon bar foreign institutional investors from investing in the sector.

An inter-ministerial committee of the government on FII participation in the markets has favoured a ban on FII investment in the retail sector.

The committee, headed by chief economic adviser in the finance ministry, Ashok Lahiri, submitted its report to Finance Minister P Chidambaram on July 6.

The minister is expected to implement the recommendations after consulting the ministries concerned. According to officials, the present stipulations do not prohibit FIIs from investing in sectors where FDI is banned, including retail, real estate and agriculture (barring tea plantations).

The committee has favoured the restrictions on the ground that any ban on foreign investment should be comprehensive. The implementation of the new rules can alter the shareholding pattern of Pantaloon Retail, the only listed retail venture in the country.

"The FII investment in Pantaloon Retail is around 20 per cent, but it keeps fluctuating," said Kishore Biyani, managing director of Pantaloon Retail.

All other retail companies are closely held, though some Indian private equity funds have invested in these companies.

Till 1997, the limit for FII investment in all sectors was 24 per cent, which was then increased to 30 per cent. In 2000, the limit was enhanced to 40 per cent under a special procedure that required an approval by the board of directors and a special resolution by the general body of a company.

The FII ceiling, under the special procedure, was further enhanced in March 2001 from 40 to 49 per cent and was subsequently raised to the sectoral cap in September 2001.

The finance ministry is not favourably inclined to opening up the retail sector for FDI. It feels such a move will not lead to a rush of investment.

"It cannot be a priority. At best, such a move can lead to FDI of Rs 50-60 crore (Rs 500-600 million)," ministry officials told Business Standard recently.

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