NEW FDI RULES TO BRING IN MORE FOREIGN EQUITY

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THE Cabinet Committee on Economic Affairs (CCEA) has adopted new guidelines for computation of foreign equity holding in Indian companies. This opens up the scope for additional foreign equity inflow into Indian companies, and, in the process, dilutes the foreign investment ceiling that had earlier been imposed on sensitive sectors such as telecom, media, aviation, banking, defence and insurance.

Except in the case of 100% subsidiaries of majority foreign-owned/controlled Indian companies, where foreign investment will continue to be measured as of now, in all other companies, any notion of indirect or proportionate foreign holding has been done away with. The entirety of investment in a company by an entity that is majority owned/controlled by foreign investors will be treated as foreign investment. If the investing company is majority Indianowned/controlled, foreign holding in that company will not reflect in the investment it makes in other companies—all such investments will count as purely Indian.

However, any such investments in sectors that have caps on foreign investment and result in foreign ownership will have to be vetted by the government or Foreign Investment Promotion Board (FIPB).

If the final investee company is a 100% subsidiary of a company that is majority owned/controlled by a foreign company, however, the foreign investment in the 100% subsidiary will be deemed to be of the same extent as that in the company of which the investee company is a subsidiary.

The department of industrial policy and promotion (DIPP) will soon issue guidelines to describe ownership and management control.

The new norms are expected to allow companies in a sector such as telecom to raise the extent of foreign investment. They will benefit all such companies that have touched their foreign direct investment ceiling and part of the investment is through an Indian company owned and controlled by resident Indians.

The government hopes to end any confusion over the issue with the new guidelines and put to rest the disputes over ownership and control, said an official press release.

Home minister P Chidambaram said: “All investments directly by a non-resident entity into an Indian company will be counted as foreign investment while foreign investment through an investing Indian company will not be considered for calculation of indirect foreign in-vestment, in case the Indian company is owned and controlled by resident Indian citizens.” “The guidelines for transfer of ownership from a resident Indian citizen to non-resident Indian entities are being revised too,” he said, adding that for sectors with caps such as defence production, air transport services and telecom, government and FIPB approvals will be required.

For instance, if company A, in which foreign investment is less than 50%, invests in company B, FDI will be nil. If company A has foreign investment more than 50% and invests 26% in company B, then the entire 26% will be calculated as indirect foreign investment. “The objective is to make (FDI policy) simple and transparent, according to Dipp,” Mr Chidamdaram said, explaining the objective behind framing the new guidelines. The CCEA approval of changes in FDI norms follows the recommendations of a group of ministers headed by external affairs minister Pranab Mukherjee. Current norms use a proportionate method to calculate indirect foreign equity. Under this method, which is followed in the case of telecom companies, if company A has foreign investment of 50% and invests 26% in company B, FDI in B will be calculated at 13% (50% of 26%). Therefore, by the present guidelines, a foreign partner in an Indian JV is not allowed to exceed its investment beyond 60% (despite the FDI cap of 74% FDI ceiling) if the domestic partner’s own equity structure has FDI that indirectly works out to 14% in the JV. With changes in the rules, the foreign partner in the JV can increase its stake (within the 74% cap) as the indirect FDI holding will not be taken into account while calculating the overall ceiling.

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