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Rediff.com  » Business » FDI: No backdoor entry into prohibited sectors

FDI: No backdoor entry into prohibited sectors

February 27, 2009 15:23 IST

Foreign investment cannot enter India through a circuitous route in sectors like multi-brand retail, atomic energy and the lottery business and will need to operate within the sectoral caps, according to new guidelines.

Foreign investment will 'have to comply with the relevant sectoral conditions on entry route, conditionalities and caps with regard to the sectors in which such companies are operating,' the Department of Industrial Policy and Promotion said.

Even a domestic firm in which investment is made by another Indian company (that has an FDI component) will be subject to the 'sectoral conditions on entry route'. This will prevent circumventing of rules though indirect investment.

India prohibits FDI in multi-brand retail, atomic energy, the lottery business, gambling and betting, chit funds and nidhi firms. Besides, an FDI ceiling has been put on sectors like insurance, aviation, asset reconstruction, private sector banking, FM radio, cable network and commodity exchanges.

The government on February 11 changed FDI policy and excluded indirect investment through domestic companies from overall sectoral ceilings, which led to the criticism that the new policy allows FDI through the 'back door' in sectors where it is banned. It also made FDI caps meaningless.

With the government subjecting the FDI through indirect route to the overall sectoral entry and ceiling norms, the 'Press Notes 2/3' of February 11 get turned upside down.

These 'press notes' had said if a parent firm has less than 50 per cent FDI invests into another company, the overseas investment would not be counted; thereby allowing firms to exceed sectoral caps.

Even the sectors where FDI was not allowed could have been considered thrown open since less than 50 per cent overseas investment was treated as domestic money.

The policy changes came under sharp criticism from the Left parties who raised the issue of 'allowing backdoor' entry in Parliament as well.

India received $19.79 billion FDI between April and November this fiscal. The country attracted inflows over $24 billion in 2008-09.

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