The government plans to bring out yet another clarification to exclude banks from the purview of its revised foreign investment norms, as it looks to prevent a clutch of Indian private banks from being categorised as foreign-owned, a senior department of industrial policy and promotion (DIPP) official said.

The status of investments made prior to the introduction of the new norms in February this year via Press Notes 2, 3 and 4 could also be subjected to further clarification.

This follows the Reserve Bank of India (RBI), backed by the finance ministry, asking DIPP, which sets the policy on foreign investment, to review its new foreign investment norms, as they could improperly categorise seven leading private banks as foreign-owned.

The RBI had recently pointed out to DIPP that under its revised FDI norms, these banks, including ICICI Bank, HDFC Bank, Development Credit Bank and ING Vysya, would cease to be counted as Indian-owned banks. The central bank has sought a review of the new guidelines.

The finance ministry, which had earlier vehemently opposed DIPP’s move to revise foreign ownership norms, has again raised these issues.

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“Instead of reversing the new guidelines, as demanded by the finance ministry, the department would only seek to address and clarify a few key issues raised by the finance ministry and RBI,” said the official, asking not to be named.

These issues include treatment of FDI in the banking sector, shielding FDI-prohibitive sectors from foreign capital and treatment of investments made prior to introduction of the new FDI calculation norms.

According to the norms laid down under Press Note (FDI notification in government parlance) 2 and 3 of 2009, if a company is owned and controlled by Indians and has less than 50% foreign holding, it will be deemed as Indian-owned. If it has a majority of Indian directors on its board, it will be considered as controlled by Indians.

Conversely, a company that has more than 50% foreign investment, whether by way of direct investment or portfolio holdings or foreign currency debentures, it would be considered foreign-owned even if Indians have the right to nominate a majority of board members and thus have control.

“Though it is not possible to reverse the new guidelines, the department would take necessary steps to address a few issues related to banking and prohibitive sectors,” the DIPP official said. The DIPP is slated to meet both finance ministry and the Rbi to discuss the issues and therefater come out with clarifications.

The department will also address apprehensions relating to foreign money entering FDI-restricted sectors such as multibrand retail, agriculture and gambling under the garb of new FDI rules.

The finance ministry’s concern is that even if foreign holding in a company is as much as 49%, its investment in another downstream subsidiary company, which can even be in a sector not thrown open for FDI, will be termed as fully domestic investment.

Another Press Note or a clarification could be issued to make clear that the government will ensure that sectors such as multi-brand retail, agriculture, lottery and atomic energy, where foreign investment is prohibited, will be kept out of the reach of even indirect foreign investment.

However, investments that have been made prior to issue of new guidelines would remain unhampered, thus making the new rules prospective in operation, the official said.

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