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Legal Pulse (corporate): All FDI Press Notes, rules consolidated into one document

The Union Minister of Commerce & Industry has released a new foreign direct investment (FDI) policy framework to rescind all previous FDI Press Notes and consolidate all FEMA, RBI Circular and Press Note regulations into one consolidated document.

The document was released yesterday evening (31 March 2010).

Minister Anand Sharma said that he expects simplification of policy and greater clarity of understanding of foreign investment rules among foreign investors and sectoral regulators through this exercise.

Sharma noted in a statement: "Having a single policy platform would also ease the regulatory burden for Government. Updation of this document will be carried out after every six months. This consolidated Press Note will be superseded by a Press Note to be issued on September 30, 2010, ensure that the framework document on FDI policy is kept updated."

The statement also said that "clarifications on issues related to Press Notes 2, 3 & 4 of 2009 and on Press Note 2 of 2005, as also certain definitional issues etc. When a decision on these is taken, the Government decision would be announced and thereafter incorporated into the Consolidated Press Note subsequently."

Press Notes 2, 3 and 4 have created difficulties for practitioners in retail FDI and other areas, although some companies have also taken advantage of the loopholes this offered and restructured relying on them.

While corporate law practitioners have welcomed the Government's step to streamline policy measures, some also feel that much still needs to improve.

Seth Dua & Associates founding partner Atul Dua told Legally India: "This will simplify lawyers advising clients as everything is in one place but besides that there is nothing new on LLP or foreign investments in law firms.

"Basically it is a compilation of existing guidelines, whatever new had to come has still not come like foreign investment in LLP and investment in the defence sector," added Dua.

LexCounsel partner Alishan Naqvee commented: "An appreciable step taken by the Government is to define 'wholesale trading', and the implied clarification that cash and carry wholesale trading and wholesale trading are the same for the regulators. Credit, in normal business practice, has also been permitted within the definition.

"The definition appears in sync with the decision of the Delhi High Court of 2004 and the common understanding prevailing all these years. The fact that the Government has not materially altered this understanding itself calls for a round of applause. The impact of restriction on sales above 25 per cent of total turnover to group companies is however to be seen on creative structures that were floated last year following ambiguities in the Press Notes 2, 3 and 4."

The Reserve Bank of India (RBI) regulates FDI transactions that are otherwise covered as capital accounts transaction under the Foreign Exchange Management Act (FEMA) 1999.

New regulation and amendments are pronounced by the Government through press notes issued by Department of Industrial Policy and Promotion (DIPP) and RBI circulars.

Comments were invited from 60 stakeholder organisation including law firms before the preparation of final draft.

The press release also mentioned that $1.72bn flowed into India in February 2010.

The consolidated policy framework document is available for download here.

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