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India – Govt plans to say ‘no’ to FDI in multi-brand retail

Gireesh Chandra Prasad

NEW DELHI: The government plans to expressly clarify that foreign direct investment (FDI) in multi-brand retail is no-go territory, dashing the
hopes of Indian retailers expecting that the new rules announced earlier this year would allow them to bring in overseas partners and capital.

The commerce and industry ministry wants to ensure that the liberalised FDI policy does not lead to the unintended opening up of multi-product retail, a sector closed to foreign investment now, an official privy to the ministry’s plan said.

The move is likely to stymie the plans of those such as Pantaloon Retail, which is owned by the Future Group and operates the Big Bazaar, Food Bazaar, Pantaloon and Home Town chains of stores.

Pantaloon Retail had initiated steps to restructure itself to take advantage of the new norms for counting FDI in the hope that it would be able to attract foreign investment. It was to have converted the listed Pantaloon Retail into a holding company and distributed assets and operations of the group among two subsidiaries.

Under the revised FDI policy announced in February, a joint venture company in which the Indian entity has more than 50% stake and the right to nominate majority of its directors will be deemed to be an Indian company.

If such a joint venture makes investment in another company, the entire investment in that company will be counted as Indian investment. Under the earlier policy, downstream investment by such a joint venture was counted as indirect foreign investment.

The new rules, it was argued, allow indirect entry into forbidden sectors such as multi-brand retail through layered corporate arrangements where initial foreign investment is kept below 50%.

“It will get clarified that the intent of the revised policy is not to allow FDI into multi-brand retail where it has been prohibited,” the official said.

The ministry will also try and clarify how the revised FDI policy will apply to the banking sector. A sticking point with the guidelines is that investments by companies that are majority foreign-owned are counted as foreign investment.

This has put banks such as the majority foreign-owned ICICI Bank in a fix. India’s largest private sector lender finds that the investments it has made in areas such as insurance — the foreign investment limit here is 26% — have been classified as foreign investment.

One of the solutions being considered is to exempt banks from the new way of computing foreign investment based on who owns and controls the investing company.

The government, however, is unlikely to exempt defence production, where 26% FDI is allowed, from the purview of the liberalised FDI policy, considering the safeguards already in place.

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October 28, 2009 - Posted by | Uncategorized |

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