Infra trusts face FDI policy hurdle,$2.5-bn plans on hold

Indian private equity funds in the infrastructure sector are hobbled by an unfriendly regulatory regime,with their big-ticket FDI proposals hitting a policy hurdle. The finance ministry has put on hold two proposals by India-registered infrastructure trusts to tie up a total of $2.5 billion in foreign direct investment (FDI),owing to the difficulty in defining the ownership of these trusts. Under the FDI policy,ownership of an entity is counted before deciding if it can accept FDI. Since trusts have only beneficiaries,rather than owners,it is hard to determine who owns a venture capital trust,especially if it has non-resident beneficiaries.

The Foreign Investment Promotion Board (FIPB) deferred decisions on two FDI proposals from trusts at its last meeting on December 18,sources said. While a trust fund,promoted by Macquarie and State Bank of India (SBI),proposed to bring in $2-billion FDI,another trust,promoted by UTI AMC,HSH Nordbank and Noor Financial,with a target size of $500 million approached the FIPB. Both trusts are private equity funds formed to invest in Indias infrastructure sector.

Even though the department of industrial policy and promotion (DIPP),which defines the FDI policy,supported the proposals,the finance ministry representatives in the Board wanted to put them on hold fearing that FDI into these trusts could amount to circumvention of new FDI guidelines under Press Note 2,3 and 4.

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DIPP has supported the proposals subject to a condition that these funds cannot invest in sectors that have entry restriction and investment caps. These sectors include retail,real estate,telecom and banking among others.

In the past,many such cases involving FDI in trusts have been rejected or held up for long by the Board based on the premise that investments in these funds,which are registered as venture capital funds in India issue units to the foreign investors instead of shares. The FDI policywhich permits issue of shares by an Indian companies to foreign companiesis silent on the issue on FDI in trusts wherein the trust that is registered as VC issues units in lieu of cash.