NEW FDI NORMS COME INTO EFFECT

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THE department of industrial policy and promotion (DIPP) has formally issued its controversial new guidelines for calculation of foreign investment in Indian companies. The new guidelines enumerated under two Press Notes — PN 2 and PN 3 of 2009 — failed to clear the utter confusion spawned by the new norms over the national identity of some important companies hitherto considered to be unalloyedly Indian, such as ICICI Bank and HDFC, or over foreign investments in barred sectors such as multi-brand retail and gambling through the indirect route.

The Press Notes have also not defined the term ‘beneficial ownership’ which forms the cornerstone of the new guidelines. The Companies Act also does not define beneficial ownership.

According to the PN 2 — which lays down guidelines for calculation of total foreign holding in Indian companies — if a company is owned and controlled by Indians, its investments would be counted as Indian. Also, if in a company, foreign holding is less than 50% and foreigners have no other ‘beneficial interest’ in the company, it will be considered as Indian-controlled. And this company would be able to invest in all the sectors, including those where FDI is prohibited at present as per the new norms. The PN does not explicitly say that such investments would not be allowed. This, thereby allows foreign investment in barred sectors through the backdoor.

An Indian company would be deemed controlled by non-resident, if foreign entities have the power to appoint directors on board or it has a majority foreign holding in it. Investments by such an entity downstream would also be deemed foreign. The only exception will be when a joint venture company creates a whollyowned subsidiary in India. In that situation, the foreign holding in the downstream company will be treated as equal to the level of FDI in the parent company.

In all sectors attracting caps on foreign investment, the equity beyond the prescribed sectoral cap, would have to be owned by resident Indians or Indian companies, as per the PN2.

In sectors like broadcasting and defence, where the sectoral cap is below 49%, the company would need to be owned and controlled by an Indian. Hence, the equity held by the largest Indian shareholder would have to be at least 51% of the total equity, it adds.

The other Press Note PN 3 — laying down guidelines for transfer of ownership and control — makes it mandatory for Indian company to seek FIPB’s nod, if it intends to transfer ownership or control to a foreign company in restricted sectors such as telecom, defence production, air transport services, broadcasting. The government has also made it mandatory for companies to provide full details about beneficial ownership to the FIPB while seeking its approval. Companies that do not comply with the new norms, they are liable to face action under Foreign Exchange Management Act (FEMA) regulations.

The PN 3 also states that FII holdings, ADRs/GDRs, NRI investment and foreign investment through foreign currency convertible bonds would now be included while calculating FDI levels of Indian companies. These were not included in the FDI calculation uptill now.

The new rule will not apply to sectors like insurance, a government official clarified. In case of insurance, FDI ceiling will continue to be calculated in accordance with the IRDA (Registration of Indian Insurance Companies) Regulations, 2000. The same will hold true in sectors like banking, commodity exchanges and stock exchanges — all regulated under RBI guidelines.

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