Soon foreign investors have to pledge that they will not do anything detrimental to India’s interest

FOREIGN investors will be required to give a commitment that they will not do anything detrimental to India’s interest as the government looks to tighten scrutiny of foreign direct investment, but experts say the regulation is not so innocuous. The department of industrial policy and promotion or DIPP, the key government body for policy on foreign direct investments, has initiated discussions with concerned ministries including finance, law, home, and the RBI.

A meeting was held last week on making such a declaration mandatory when a foreign investor brings capital into the country.

“We have initiated discussions with all concerned ministries.. A directive will be issued soon,” a senior DIPP official told.

The seemingly harmless commitment could impose great burden on the investors in terms of due diligence of people they employ or technology they use.

The requirement could be equally difficult on joint ventures with foreign companies or companies that have foreign private equity investment in them.

“It (Indian company) may not even have the wherewithal to undertake due diligence on foreign investor and its investors with respect to compliance with money laundering laws etc,” says Akash Gupt, executive director, PWC, adding that Indian company can only give a guarantee on its own behalf not for others. The proposal follows a committee of secretaries suggesting changes in the foreign direct investment policy for certain sensitive sectors and a new law for post-investment surveillance of investors.

India has attracted $131 billion in foreign investment since 1991, when it opened its economy to foreign investors. Over 40% of this has come from Mauritius, which means its actually a third country investment, the origin of which may be difficult to trace.

Since enacting a new legislation will take time, the DIPP has proposed making a security declaration mandatory for all foreign investors irrespective of the sector they plan to invest in. The rule will apply to all sectors including those on the automatic route and not requiring Foreign Investment Promotion Board’s approval.

Foreign investor could be asked to give an undertaking that he will comply with the provisions of the Prevention of Money Laundering Act and Unlawful Activities Prevention Act. The declaration will be on the lines of FC-GPR, a form an Indian company has to file with the RBI within 30 days of receiving foreign capital raised through shares or convertible debentures.

The declaration will have to be filed at the time of filing of FC-GPR, the official, who did not wished to be named, said adding the exact modalities of the declaration were being worked out.