INDIA BUSINESS WORLD - JULY 2006
THE MONTH THAT WAS...

AGRI, PLANTATION GET 100% FDI FREEWAY BY DEFAULT

HAS THE government allowed 100% foreign direct investment (FDI) in agriculture and plantations with automatic clearance thrown in as an additional bonus for foreign investors? In normal course, this explosive question would have come from the Left parties, BJP or UPA allies. This time around, a missive has been fired by RBI, which has found incongruities in the UPA government's ambitious plan to liberalise FDI policy, especially in sensitive areas like agriculture, plantation, real estate and transfer of shares to non-residents.

Shifting residual items — which are not listed specifically — to the automatic route means sectors like agriculture and plantations are open to 100% FDI, the apex bank has said in a communication to the department of industrial policy & promotion (DIPP). As of now, FDI is allowed only in some areas of plantation and agriculture. “The government may let us know whether a policy decision has been taken to allow FDI up to 100% in agriculture/plantation activities,” says the RBI letter.

As a result of the queries from RBI, amendments to the Foreign Exchange Management Act (FEMA) regulation have not been carried out so far to give effect to the FDI reforms concerned. “We request the government to kindly consider the above and advise us, so that requisite amendments can be made to the FEMA regulation,” says the RBI communication.

FDI in agriculture and plantation is sensitive in view of the storm over suicide by farmers in various parts of the country. Transfer of shares to non-residents has become a bone of contention since the finance ministry is of the view that such transfers need approval from RBI — making them ineligible for the automatic clearance route proposed by the central government.

The government had decided, on the basis of recommendations from a group of ministers (GoM) headed by agriculture minister Sharad Pawar, to take out agriculture and plantations from the list of prohibited activities since FDI is permitted in some areas of these sectors. As it has been stated that in sectors/activities not listed in press note 4, which communicated the liberalisation, FDI is permitted up to 100% in the automatic route, RBI feels that areas like rubber and tea have been inadvertently thrown open for 100% FDI through the automatic route.

 Ditto is the case with real estate, which has also been taken off the prohibited list. “Similarly, real estate other than construction/development covered by Press Note 2 of 2005 Series will also be eligible for investment under Item III, which permits 100% FDI under automatic route. This is inconsistent with the current FDI policy in real estate,” says the RBI letter to DIPP. As of now, FDI is permitted in real estate only if the project adheres to a minimum size and the company concerned has a level of capitalisation. In the case of transfer of shares (held by residents) to non-residents, the government had allowed clearance through the automatic route in the case of financial services and activities attracting clearance from Sebi, RBI and Irda. RBI feels that government policy needs to be clarified since the finance ministry has taken a different view on the subject while dealing with transfer of Federal Bank shares to IFC.

“Under Regulation 10A(b) of FEMA 20, transfer of shares by way of sale from resident to non-residents required prior approval of the government (FIPB) and RBI. The revised guidelines have done away with FIPB approval by putting the transactions under automatic route subject to the conditions indicated above. We are of the view that requirement of RBI approval under Regulation 10A (b) of FEMA 20 will continue to be applicable to the financial sector. In view of the letter of February 27, 2006 , from the ministry of finance to ICICI Bank in connection with purchase of shares of Federal Bank by IFC from ICICI Bank, we shall be glad if our understanding as indicated above is confirmed,” says the RBI communication.