logo logo

Trade pact with China stuck over security

Business Standard, India

Trade pact with China stuck over security

By Monica Gupta / New Delhi

8 August 2006

Security concerns over investments from China is impacting the proposed Bilateral Investment Promotion Agreement with Beijing. North Block’s proposal to amend the Foreign Exchange Management Act (FEMA) is stuck, delaying the signing of the agreement.

“We have finalised the contours of the BIPA. However, the agreement cannot become effective unless FEMA is amended,” a senior finance ministry official said. Officials said China had agreed to limit the coverage of the BIPA to cover companies post-establishment.

FEMA contains restrictions with regard to setting up of a branch or liaison office in case of Chinese citizens.

“No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China without prior permission of the Reserve Bank of India shall establish in India a branch or a liaison office or any other place of business by whatever name called,” FEMA 2000 states.

“As per FEMA norms, even if the sector falls under the automatic route of foreign direct investment, a Chinese company wanting to establish a place of business in India would still require specific approval of the RBI. The apex bank would check the antecedents of the company before granting approval,” said Akash Gupt, associate director, PricewaterhouseCoopers.

Its not just the BIPA with China which is affected by FEMA. A BIPA with Bangladesh is also on hold. The agreement was to be signed in March this year but was put on hold due to FEMA.

Senior government officials said even the investment agreement under the South Asia Free Trade Agreement, to which India is a signatory, could not become operational until FEMA was amended.

Under FEMA rules, the foreign direct investment scheme is not available to both citizens and entities of Bangladesh and Pakistan. The government had, in September 2004, lifted the investment restriction for citizens from Sri Lanka.

Officials said a partial relaxation of FEMA rules was under consideration for Bangladesh. “While the restriction on individuals investing from across the border is likely to continue the restriction on corporate investments could be lifted,” an official said.