Govt Tweaks FDI Rules, Wholesalers Gain.

NEW DELHI: In a move seen as benefitting wholesalers such as Bharti Wal-Mart, the government on Wednesday allowed retailers to sell goods sourced from their foreign investment-funded wholesale ventures by removing the stipulation that such sales should be for internal use. However, the 25% limit on such sales remains, implying that bulk of the goods will have to be sourced from outside the group.

The revised guidelines, issued through a circular on foreign direct investment, also allowed the use of internal funds for investment in downstream ventures but made things difficult for the construction sector.

“The change has been made in response to request for simplification of the guidelines received from stakeholders,” the industry ministry said referring to the rules on wholesale while releasing the consolidated policy that is effective from October 1. The earlier policy put out by the industry ministry in April this year had imposed many restrictions on foreign investment funded retail in , including stiff guidelines for sale to group companies.

Such sales to group companies could be only 25% of the total sales of the wholesale venture and they had to be for the internal use of the buyer.

This was done to preclude indirect access to foreign investment to organised retail. Foreign investment is not allowed in multi-brand, but wholesale ventures can have 100% foreign direct investment.

The restrictions had hurt Bharti’s retail plans in India. , an equal equity joint venture between Wal-Mart and the Bharti group, runs a cash and carry, or wholesale, retail operation.

This company sells merchandise to Bharti unit Bharti Retail, which operates under the Easyday banner.

“This is a step forward from the April directive but it still remains very restrictive,” said Akash Gupt, executive director, PwC.

The new policy has also relaxed the rule for fully foreign-owned non-banking finance companies, or NBFCs, that meet the condition of minimum capitalisation of $50 million. These have been allowed to set up subsidiaries for specific NBFC activities without bringing additional capital.

The new FDI guidelines issued last year had said companies that receive downstream investments from foreign companies have to comply with relevant sectoral conditions including minimum capitalisation. This meant that every subsidiary of NBFC had to be capitalised as per the sectoral requirement.

The policy clarified that internal accruals of existing foreign ventures can be used to fund downstream investments, but these would have to comply with the restrictions on downstream investments on foreign companies, owned and/or controlled by non-resident entities.

The construction sector now faces a more restrictive regime. The FDI policy earlier said the original investment cannot be repatriated before a period of three years from completion of minimum capitalisation. This had created policy confusion, leading to the interpretation that only initial investment was locked in. The government has said entire FDI in construction will be subject to the three-year lock-in.

The other policy changes include counting of share premium towards minimum capitalisation and change in definition of ‘capital’ to allow FDI in partly-paid shares and warrants, through the government route.

Share swaps as means of bringing FDI explicitly allowed through the policy and the ban on FDI in tobacco incorporated in the consolidated document.

Source : economictimes.indiatimes.com