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Ease of doing business: Government likely to remove sectoral conditions like minimum capitalisation

Economic Times:  October, 2015

New Delhi: India is expected to remove sectoral conditions such as minimum capitalisation, shareholding restrictions and non-compete clauses for foreign investors to create a level playing field with domestic companies as part of the next phase of a proposed ambitious clean-up of FDI policy.

Foreign investors will be subject only to those norms imposed by sector regulators or departments, ensuring parity with domestic investors. Sectors that would benefit the most from this clean-up are nonbanking finance, venture capital, construction, pharmaceutical and retail. The attempt would be to remove most conditions tied to foreign direct investment, retaining only those that have strategic or national security considerations.

"Sectoral conditions only burden the FDI policy...They also lead to duplicity of conditions," said a government official. "A call would be taken keeping in view sensitivities of the sector." The government is keen to build on the high attention India is getting from foreign investors, who pumped in $19.4 billion as FDI in the January-June period, a 30% increase from a year ago.

Many sectors have numerous conditions for foreign investors to comply with, over and above what domestic companies have to follow. Foreign investors setting up NBFCs have to bring in $500,000-$50 million while investment in construction has a minimum area requirement. Acquisitions by foreign companies in the pharmaceutical sector are subject to norms designed to ensure availability of drugs. Multi-brand retailing has norms on product sourcing and setting up backend infrastructure such as logistics and warehousing.

The government is working to simplify these conditions in the FDI policy to improve the ease of doing business in the country and cut down the time taken for investments to flow in.

The National Democratic Alliance government has raised foreign investment limits in sectors such as defence and insurance. In the second leg of reforms, the focus is on policy simplification. The current consolidated FDI policy runs into over 120 pages with significant space devoted to detailing the special conditions for each sector.

"The FDI policy should be simple," the official said. The government hopes to signal that once foreign investment comes in, it will not be subject to any discriminatory special conditions.