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Govt may put curbs on FDI in financial space
August, 18th 2006
Foreign investors eyeing the automatic route to step into Indias financial services business may face a roadblock in coming days. The Reserve Bank of India has told the government that it is not in favour of foreign direct investment (FDI) coming into the financial sector through the automatic route. The present policy provides for 100% FDI through the automatic route, subject to minimum capitalisation norms for non-banking finance companies (NBFCs) and other approved activities, such as merchant banking, underwriting portfolio management, asset management, venture capital, financial consultancy, stock broking, credit reference agency, credit rating, leasing and finance, forex broking, money-changing business, housing finance, custodial services and micro and rural credit. Indications are that the policy contours on FDI through the automatic route in financial services may be re-drawn. Under the automatic FDI route, overseas investors who are eligible and fulfil certain norms can invest directly in a local firm or set up a new company in specified sectors, including financial services. Subsequently, they have to report to the RBI, which approves such proposals ex post-facto. The opposition stems from the regulators belief that a proper due diligence and assessment of the entities investing in the financial sector is warranted before granting approval. The broad principle un-derlying this stance is that given the stated goal of financial stability and the impact of a collapse of any large entity on the financial sector, it will not be desirable to allow automatic entry for overseas inves-tors. Given the stringent restrictions on FDI in commercial banks, some overseas investors have chosen the NBFC route to get a toe-hold in the financial services space. Today, a strong case is being made against the unbridled opening up of the domestic financial sector because of the fragility of the sector and the difficulties in making a clear-cut distinction between a current ac-count and capital account. Globally also, many regulators are tighten-ing norms for entry into the financial sector, citing stability concerns and quality of capital flows. The regulator wants the government to take a relook at this policy and also other aspects of the FDI policy to ensure consistency, government officials said. It has even sought policy clarification on foreign investments in all exchanges. However, neither commodity ex-changes not categorised as finan-cial services nor stock exchanges figure in the list of sectors that re-quire the governments prior per-mission for FDI. This list is part of the Press Note 4 issued by the government. In all likelihood, it could be an afterthought by the regulator which now feels that exchanges, just like agriculture, are sensitive sectors and have been mistakenly omitted from the list. A clause in the Press Note categorically says that FDI is automatic in all sectors not included in the list. In fact, the bigger issue is not including agriculture in the list. Both the commodity exchanges, MCX and NCDEX, have attracted foreign investment, while BSE has hired investment banks to bring in foreign investors. The automatic route for FDI is also open for transfer of shares from residents to non-residents in financial services, subject to the sectoral policy on overseas investment. This was spelt out by the department of industrial policy and promotion in Press Note 4. However, this also appears to be a bone of contention between the government and the regulator. On the automatic route, the issue is more serious when it comes to a buyout of a local unit by a foreign investor. If the regulator has a problem during the ex post-facto approval, it becomes all the more difficult to unwind such a transac-tion. It is in the context of all these issues that the regulator wants the government to revisit the policy especially outlined in Press Note 4 and provide clarity.
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