New circular clarifies FDI guidelines

On 1 October, the Department of Industrial Policy and Promotion issued a new circular on foreign direct investment (FDI) policy. Circular 2 of 2010 clarifies the following points:

1. The manufacturing of “cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes”, in which FDI had been prohibited earlier this year, has now been formally included in the list of sectors/activities in which FDI is prohibited.
2. Non-banking financial companies (NBFCs) that are 100% foreign-owned with a minimum capitalization of US$50 million can set up subsidiaries for specific NBFC activities, without raising additional capital for minimum capitalization. This point was clarified following uncertainty about whether such downstream subsidiaries were independently required to meet minimum capitalization conditions.
3. Downstream investments through internal accruals are now permissible, providing that Indian companies “owned and/or controlled by non-resident entities” adhere to guidelines for these investments. FDI policy states that operating and investing companies would have to bring in funds from overseas rather than leveraging funds from the domestic market for downstream investments.

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   The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.