Consolidated FDI policy – introducing changes

On 31 March, the Department of Industrial Policy and Promotion (DIPP) issued circular 1 of 2010 to consolidate all policy on foreign direct investment (FDI). This includes policy contained in the Foreign Exchange Management Act, 1999 (FEMA), regulations issued by the Reserve Bank of India (RBI), and press notes issued by the DIPP.

Although circular 1 states that it did not intend to modify the existing regulations, it has introduced certain changes and conditions. Some of these changes are ambiguous and need to be clarified in the updated consolidated circular to be issued on 30 September.

While circular 1 permits FDI of up to 74% in Indian companies that provide non-scheduled air transport or ground handling services, it requires prior approval from the government for FDI beyond 49%. In contrast, under the now rescinded press note no. 4 of 2008, FDI up to 74% in such activities was permitted under the automatic route. Similarly, in the private banking sector, circular 1 requires prior government approval for FDI beyond 49% and up to the 74% threshold limit. This appears to contradict the earlier press note (no. 2 of 2004) that permitted up to 74% of FDI under the automatic route.

Juhi Singh is a partner at S&R Associates, a New Delhi-based law firm.