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FDI policy: RBI picks gaping holes
July, 12th 2006

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 the normal course, this explosive question would have come from the Left parties, the BJP or allies of the UPA.

This time around, a missive has been fired by the Reserve Bank which has found incongruities in the UPA governments ambitious plan to liberalise the 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, the 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, the letter says.

As a result of the queries from the RBI, amendments to Foreign Exchange Management Act Regulation (Fema) 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 the requisite amendments can be made to the Fema Regulation, says the apex banks 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 the 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 headed by agriculture minister Sharad Pawar, to take out agriculture and plantations from the list of prohibited activities since FDI is permitted in some segments of these activities.

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% on the automatic route, the RBI feels 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 minimum size and the company concerned has certain 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 the Sebi, the RBI and the IRDA.

The RBI feels the government policy on the issue needs to be clarified as the finance ministry has taken a different view on the subject while dealing with the transfer of Federal Bank shares to International Finance Corporation.

Under Regulation 10A(b) of Fema 20, the transfer of shares by way of sale from resident to non-residents required prior approval of the government (FIPB) and the RBI. The revised guidelines have done away with the approval of the FIPB by putting the transactions under Automatic Route subject to the conditions indicated above.

However, we are of the view that requirement of RBI approval under Regulation 10A (b) of Fema 20 will continue to be applicable for the financial sector.

In view of the letter dated February 27, 06 from Ministry of Finance to ICICI Bank (copy enclosed) in connection with purchase of shares of Federal Bank by International Finance Corporation from ICICI Bank, we shall be glad if our understanding as indicated above is confirmed, says the RBI communication. The DIPP has also been asked if commodity exchanges should also be kept in the prohibited list till a policy decision is taken.

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