The government plans to keep a tight vigil on foreign investment inflows by making it mandatory for companies bringing in foreign equity to periodically disclose the end-use of such funds. The Economic Intelligence Council (EIC), led by finance minister Pranab Mukherjee , has called for ‘full disclosure’ of FDI details by the industry. The department of industrial policy & promotion (DIPP) is working on a format for submitting information to the government.

Currently, there is no mechanism for monitoring the actual use of FDI and regulatory agencies do not go beyond mandatory clearances at the time of approving foreign investment proposals. This has the government worried since it does not want FDI flows to be exploited for money laundering or diversion of foreign investment flows for speculation in the stock market or real estate.

The government wants to put in place a detailed system to make companies come out with full details of ownership, background of promoters, sourcing of funds and investment history, said an official with DIPP, who asked not to be named due to the sensitive nature of the issue and the involvement of security agencies.

The Reserve Bank of India had also asked the government to get either administrative departments or state governments to monitor end use of FDI inflows. The Intelligence Bureau , the National Security Council and the EIC have also discussed the issue, the official said. The home ministry and the working group on intelligence apparatus, a co-ordination committee set up under the leadership of the revenue secretary, are also involved in the discussions. Mandatory disclosures would mean additional paperwork for the companies. If deviations are found during monitoring, penal action will be taken against erring companies.

The National Security Council has been working on an umbrella legislation to ensure that FDI policy does not clash with national security concerns. Since work on the proposed legislation has slowed down due to differences of opinion within the government, the EIC is now handling some of the issues like monitoring of FDI.

The EIC’s mandate is to improve co-ordination among enforcement and intelligence agencies dealing with economic offences and the income tax /customs wings of the department of revenue. The Council is supposed to come up with an oversight mechanism to evolve policy responses to economic offences. Among the first sectors to come under scanner when the new mandatory reporting norms kick in would be FDI in private banks, power, greenfield airports, real estate and breweries, another government official said.

While 100% FDI is allowed in these sectors through the automatic route, these segments are subject to sectoral guidelines. Since no clearances are required for these sectors, the companies concerned keep the RBI informed. In fact, there is no provision under the FDI policy or Foreign Exchange Management Act (FEMA) for which RBI is the nodal agency. Violation of FEMA guidelines lead to imposition of penalty by RBI, but this happens mostly in cases where the offender voluntarily discloses the violation.

The RBI has been in touch with the DIPP over the issue, the official said. The central bank’s concern is primarily about diversion of FDI inflows into real estate for speculation. While there are restrictions on acquisition of property by non-residents other than NRIs and PIOs, the curbs are circumvented by bringing funds into companies that are meant to operate in the hotels or tourism sector. Such speculation can lead to asset bubbles in real estate, the RBI feels.

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