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THE more the government simplifies norms for foreign investment, the harder it gets for foreign capital to enter India. At least that is the case with the latest Press Notes (Nos. 2 and 3 of 2009) issued by the department of industrial policy & promotion. Some investments that were permitted under the automatic route in a few key sectors will now require clearance by the Foreign Investment Promotion Board (FIPB) and the government, thanks to the new ‘simplified norms’.

Press Note 3 calls for FIPB/government approval when an Indian company is being set up with foreign equity participation and non-resident control or ownership in any of the sectors with caps on foreign investment: defence production, air transport services, groundhandling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecom and satellites. Of these, insurance, banking and air transport were under the automatic route and investment proposals in these needed only the approval of the sectoral regulator. Now, the automatic route stands shut for these sectors and investment proposals will have to be vetted by the government as well as the sectoral regulator. The new move adds a layer of scrutiny thereby making the process cumbersome.

Government approval is also called for when ownership or control of a company in any of these sectors is transferred to a non-resident entity as a ‘consequence of transfer of shares to non-resident entities through amalgamation, merger or acquisition’. “Press Note 3 applies where there exists sectoral cap and transfer of shares from resident to non-resident resulting in transfer of ownership or control. Such a transfer would require prior FIPB nod,” said E&Y partner Samir Kanabar.

Approval would be needed if an Indian company is being established with foreign investment and is owned or controlled by a non-resident entity and control or ownership of an Indian company is being transferred to a non-resident entity.

“The guidelines and subsequent Press Notes have not helped in clarifying what constitutes or does not constitute FDI investment both from the investment as well as regulatory perspective,” said KPMG associate director Apurva Mehta.

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