Foreign companies may not need government approval to hold up to 49% equity in Indian arms in most sectors, with theManmohan Singh administration planning an overhaul of the foreign investment regime to attract overseas capital.

A senior official said the government was considering raising the minimum foreign investment cap to 49% for all sectors, including defence production, exceptpension and insurance sectors, which will require legislative amendments. It also plans to do away with the requirement of mandatory approval from the Foreign Investment Promotion Board if foreign holding does not exceed 49%.

Theoretically, this could mean a Jet-Etihad type transaction, which is currently pending before the FIPB, might not need such a permission. But the official said the government could retain sensitive sectors within the purview of the FIPB if it felt issues of national security or other strategic considerations were involved.

In addition to raising the minimum foreign investment cap to 49%, the government is also planning to liberalise the ceilings for other sectors that are currently at 51% and 74%. The telecom department has said it supports 100% foreign investments in the sector.

FDI is banned in some sectors such as lottery and casinos. The government is reviewing these sectors, but no decision has been taken.

Review of FDI caps on for few months

India has broadly capped FDI at four levels - 26%, 49%, 51% and 74%. At present, defence production, insurance and pension, news channels and FM radio have FDI cap of 26%, while up to 20% foreign investment is allowed in state-owned banks.

The government has been reviewing the FDI caps for the past few months. It had toyed with the idea of abolishing all ceilings altogether, but now appears to be taking a less radical approach. "We are looking at every sector. The principle is very simple: Does the FDI cap serve any purpose today? If it does, we will keep that cap. If not, the cap should be either relaxed or removed," Finance Minister P Chidambaram said last week.

Commerce & Industry Minister Anand Sharma said on Sunday that he will soon hold deliberations with the prime minister and the ministers of defence, Finance and telecom on the next steps for raising foreign investment in defence and telecom sectors.

"This is an area of high priority, given its potential for enhancing capabilities of manufacturing and technology transfer in India. The Department of Industrial Policy & Promotion (DIPP) will soon move the Cabinet for further liberalisation in other sectors which hold potential for FDI inflows," Sharma said.

In his budget speech, Chidambaram had announced that if a single foreign investor held less than 10% in a company, it would be considered portfolio investment, whereas a holding of more than 10% would be counted as foreign direct investment.

A panel headed by department of economic affairs Secretary Arvind Mayaram is expected to submit its final report regarding the implementation of these new definitions by Tuesday. While the remit of the Mayaram committee is confined to the portfolio investment vis-a-vis foreign investment issue, it is possible that it might make broader recommendations and might touch upon sectoral caps as well.

The government is also thinking about havingsectoral caps that are composite in nature and encompass all kinds of foreign investment, moving away from the current regime of separate limits for foreign direct investment and portfolio investments.

Discussions about a comprehensive review of the foreign direct investment policy have been on for a few years. The DIPP had, in a discussion paper released in 2011, argued that foreign investment caps had lost relevance. The Reserve Bank of India and the finance ministry had strongly endorsed the contents of the paper.

But it's the contraction of foreign direct investment inflows and the growing current account deficit that has forced the government to act with urgency. (Economic Times)