Govt puts out debate paper on foreign investment norms

NEW DELHI: The government has kicked off a formal debate on foreign investment norms after a series of cases involving issue of shares for non-cash consideration raised concerns among government departments.

A discussion paper released on Tuesday invited stakeholders to submit views on a range of issues such as restrictions on foreign investment, safeguards needed, possibility of money laundering, valuation issues and whether to allow issue of shares against intangibles.

The decision to review of the rules follows concerns raised by the foreign investment promotion board ( FIPB), a key government body that approves foreign investments.

The proposed foreign investment guidelines will cover share swaps that take place in mergers and acquisitions, says the paper put out by the department of industrial policy and promotion (DIPP), the key policy making body on foreign direct investment.

The paper cites the FIPB Review 2009, which said issue of share for non-cash consideration could not be allowed to become the norm as it defeats the basic purpose of attracting investments.

“Business has become lot more dynamic now and there are lots of practical situations that require such transactions. They should be allowed with appropriate checks and balances,” said Akash Gupt, executive director at consulting firm PwC.

The current policy allows equity allotment to a non-residents against receipt of funds through normal banking channels. But at times Indian companies are also allowed to convert their overseas loans, or external commercial borrowings (ECBs), into shares and preference shares, subject to investment and market guidelines.

The issue of allotment of shares in lieu of sweat equity had also figured in the dispute in the case the Kochi franchisee of the Indian Premier League, a body that conducts the national league of Twenty20 cricket. The FIPB has been taking decisions on a case-to-case basis, but has flagged the need for a considered policy.

The board had rejected a proposal by MD Group Inc of Canada for issuance of shares against franchisee rights. It also declined a proposal to issue shares against trade receivables.