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India Relaxes FDI Rules

by Mary Swire, Tax-News.com, Hong Kong

06 April 2011


India’s Commerce Ministry has relaxed rules governing foreign direct investment (FDI) after more than 15 years, so that foreign companies can establish fully-owned subsidiaries in India without having to gain the permission of their Indian partners.

A Circular issued by the Ministry of Commerce and Industry on March 31 stated that the government has decided to abolish the condition of prior approval in cases of existing joint ventures and technical collaborations in the ‘same field' to "promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI."

"There is a felt need to attract fresh investment and technology inflows into the country, as also to reduce the levels of State intervention in the commercial sphere," the Circular stated.

The guidelines relating to downstream investments have also been "comprehensively simplified and rationalized," according to the Circular. Under these changes, companies have now been classified into the following two categories: "companies owned or controlled by foreign investors"; and "companies owned and controlled by Indian residents." As a result, the earlier categorization of "investing companies" "operating companies" and "investing-cum-operating companies" has been abolished.

This will be welcome news to many companies across the globe keen for a slice of the potentially huge Indian market, but previously concerned about the unpredictability of doing business in India, including corruption and also India’s ever-changing tax policies. The USD2.5bn tax bill handed to Vodafone after the company purchased a stake in Hutchison Essar, is a very good example of what has gone wrong for foreign companies in the recent past.

The Indian Government is keen to halt the decline in FDI which has fallen substantially over the last year. In a statement just released it said that the move should promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows. Commerce Minister Anand Sharma said that it should “go a long way in inspiring investor confidence”.

The Associated Chambers of Commerce of India (ASSOCHAM) was also pleased at the announcement, saying that it appreciated the additional policy flexibility for Indian companies to raise overseas capital.

"The measures will promote India as a competitive investment destination," said D.S. Rawat, secretary general. "The steps will attract higher levels of FDI and technology inflows into the country."

TAGS: tax | investment | business | India | commerce | law | e-commerce | manufacturing | multinationals | controlled foreign corporations (CFC) | regulation | telecoms

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