Islamabad: In a major step forward towards normalising business ties, the Indian government plans to bring changes in the Foreign Exchange Management Act (FEMA) to allow investments from Pakistan, a senior government official said Thursday.

"Commerce ministry has sent a proposal to the finance ministry for change in FEMA rules to allow investments from Pakistan," said a senior official who is accompanying Commerce and Industry Minister Anand Sharma on his official trip here.

Pakistan is the only country from where investment is not allowed in India.

A commerce and industry ministry official, who does not want to be named, said investments from Pakistan could be allowed by a change in the FEMA regulations. "It can be done by simply issuing a notification."

All the foreign exchange transactions in India are governed by the FEMA regulation, which came into force in 2000. This is a civil legislation and the Reserve Bank of India can make the changes to allow Pakistani investment after taking approval from the finance ministry.

Asked whether the investments would be sector-specific, the official said: "Our FDI policies are not country-specific. Once there is a change in FEMA regulation, they can invest in whatever sector it is allowed."

To address the security concerns, the official said, once the FEMA regulation is changed, all the foreign direct investment (FDI) proposals from Pakistan would have to be cleared through the Foreign Investment Promotion Board, a department of the finance ministry.

Bilateral trade between India and Pakistan was $2.7 billion in 2010-11, but there is no two-way investment so far.

The commerce and industry minister, who is leading a high level business delegation to Pakistan, said Wednesday that the two countries were mulling an agreement to promote and protect cross border investments.

India and Pakistan, whose relations have been marred for decades by a host of issues, including Kashmir and terrorism, have announced several measures in the recent months to normalise business and economic ties.

The two countries Wednesday signed three deals and agreed to normalise visa regimes and move from "positive list" to a short "negative list" trade regime by the end of this month, a major step forward to ease trade norms and facilitate movements of people.

"In the last 10 months much has changed. We are serious and sincere in deepening economic engagements with Pakistan," Sharma said.

Business leaders are also enthused by the recent increase in ties between the two countries.

"It's a very good beginning. Things should move step by step," said Sudhir Jalan, co-chairman of Kolkata-based Rieter India Private Ltd.

President of the Federation of Indian Chambers of Commerce and Industry (Ficci) R.V. Kanoria said businesses of both the countries would be happy to invest in cross-border business if the proper policies were put in place.

(Gyanendra Kumar Keshri can be reached at gyanendra.k@ians.in)

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