COMPANY LAW
| Curbs on foreign cos to reinvest profits in arms may be lifted Fri, 03 Sep 2010 21:58:11 GMT |
| The Economic Times Curbs on foreign cos to reinvest profits in arms may be lifted NEW DELHI: There should not be any restriction on foreign firms operating in India that seek to reinvest their profits in domestic subsidiaries, suggested a key government body on foreign direct investment policy. Reinvested earnings of foreign companies should be considered as foreign direct investment (FDI), the department of industrial policy and promotion (Dipp) said in a letter to the finance ministry. “If companies are not permitted to fund downstream investments from internal accruals, such funds can be distributed as dividends and then the eligible amount repatriated and reinvested as FDI (foreign direct investment),” the department said in the letter. The request from the department comes after the foreign investment promotion board (FIPB) refused a request from Siemens for waiving off the penalty levied by the Reserve Bank of India’s (RBI) on the company for investments made from internal accruals. The decision indicates that there is no consensus in the government on relaxing the policy in respect of use of internally generated funds by foreign ventures. The FIPB is a nodal government body for decisions on foreign investments and has representation from various ministries. Experts agree with Dipp’s assessment that funds can always be brought back through this cumbersome process, so there was a need to relax the rules. “Dipp has flagged an important issue to the government,” said Akash Gupt, executive director tax and regulatory service at consultancy firm PricewaterhouseCoopers. The current rules (Press Note 9) allow downstream investments by foreign-owned holding companies under the automatic route if the funds are brought from outside. In other words, funds from domestic market or the profits generated here cannot be used for such investments. A Dipp official, however, said the intention of the rules was to dissuade foreign firms from funding its downstream activities through debt and borrowings from the domestic market. To support its argument, the department has cited an October 2002 report by a government committee — the Committee on Compilation of Foreign Direct Investment In India. “The report relied on IMF, UNCTAD and OCED definition of FDI and acknowledged that ‘reinvested earnings’ should be part of FDI,” the department said in the letter to the finance ministry. Independent experts have also argued for more clarity on the policy. “Dipp may invite public comments on this issue as it does on other issues,” said Samir Kanabar, tax partner at Ernst & Young, adding that the policy should allow foreign investments to grow. |
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