New Delhi, Dec. 16: The Congress- led government last week withdrew from the Union cabinet a proposal to rework limits on foreign investments in many sectors as it wants ministries to hold informal discussions and iron out their differences.

Top officials said a major difference that cropped up during the cabinet meeting was on treating investments by foreign institutional investors (FIIs) in pre-initial-public offers (pre-IPOs) of real estate firms.

The commerce and industry ministry wants these investments to be treated as normal portfolio inflows. It has made the proposal a cornerstone of its cabinet note on foreign investment.

However, the department of economic affairs of the finance ministry had turned this down and said such investments by FIIs were similar to foreign direct investment (FDI) because the FIIs were in a sense promoters of real estate companies.

It wants the FII investments to be hemmed in by rules for FDI in real estate that are there in Press Note 2 issued in 2005. This note stipulates FDI only for townships, built-up infrastructure projects and construction development projects, with specifications on size and minimum capitalisation.

On the other hand, the department of industrial policy and promotion of the commerce ministry considers this interpretation wrong and restrictive. It said FIIs can infuse funds in portfolio investment schemes under the Foreign Exchange Management Act.

Estimated FDI inflow to the sector is now between $5 billion and $5.5 billion. Industry ministry officials say if FII investments in real estate are allowed through pre-IPO deals, this figure can jump significantly. The finance ministry has not accepted the argument. It says the Reserve Bank of India has earlier warned of a bubble emerging in real estate, while urging caution in policies for the sector.

The finance and commerce ministries are also at loggerheads over sub-limits on foreign investment in commodity exchanges.

Both agree on a 49 per cent limit on foreign investment in the exchanges, but the finance ministry wants sub-caps of 26 per cent for FDI and 23 per cent for investments by FIIs. It also wants FII investments through the secondary market and not the primary market.

The finance ministry is possibly trying to prevent control of the exchanges by a foreign commodity firm as this may lead to manipulations. On this matter, a note by the department of industrial policy and promotion says “there is no strong justification for imposing separate caps on FDI and FII within the overall cap on foreign investment.

The department is also unwilling to place restrictions on the way FIIs purchase their shares in commodity exchanges.

Despite the policy differences, foreign investors have made a beeline for commodity exchanges.

In September, four foreign investors have picked up a 15 per cent stake in the Multi Commodity Exchange of India, the leading commodity bourse in the country. They are Merrill Lynch, Citigroup, Passport India Investment (Mauritius) and GLG Financials Fund. However, this investment did not violate the sub-limit norm.

Officials say usually the finance ministry comes out as pro-reforms in most policy debates, but in these cases it is dragging its feet and advocating a more cautious approach.

They said the ministry believed there were inherent dangers in opening up certain sectors without adequate checks.

In the global FDI sweepstakes, China and India are, respectively, the first and second-most attractive destinations, according to a study by A.T. Kearney. The study has prepared a list of top 25 attractive destinations, and there are 15 emerging countries in the list.