The finance ministry is learnt to have raised a serious objection to the proposed relaxation in the foreign direct investment norms in restricted sectors such as telecom and insurance.

According to sources in the government, in a meeting of a group of ministers on Tuesday, the finance ministry representatives argued that the proposed relaxation would effectively remove the current limits in the respective sectors. Sources said senior members of the GoM also objected to the proposed relaxation.

The Ministry of Commerce and Industry has suggested that indirect foreign investment through holding companies in which a resident Indian has a majority stake should not be counted while calculating the sectoral cap. In 2006, the government had relaxed the FDI limit in telecom to 74 per cent from 49 per cent. The government had clarified that both direct and indirect foreign holding should be counted.

Even in the case of the insurance sector, it had stated that the foreign ownership in the holding company should be counted while calculating the sectoral cap of 26 per cent.

Raising objection, a senior government official said the proposed relaxation would circumvent the current sectoral caps as was the case in the telecom sector before 2006 when many Indian promoters breached the cap of 49 per cent by inducting foreign capital from the same investors in holding companies as well as in operating companies.

Government sources said since the foreign investment in the sector was allowed up to 74 per cent, any relaxation would result in bringing down the Indian holding to a negligible level through complex structuring of investment companies. "In spite of giving such windows, if the government feels that foreign investment should be encouraged in a certain sector and the current restriction is creating a hurdle, it should remove the restriction altogether," said a source.