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FDI policy set for revamp

March 14, 2013 08:07 IST

In its bid to bring more clarity on the definition of ‘control’ in the country’s foreign direct investment (FDI) policy, in sync with that in the Companies Bill, the Department of Industrial Policy and Promotion (DIPP) would soon move a Cabinet note to amend the policy.

This would be to clearly define the rights of a person or company, especially foreign, with controlling stake in an Indian entity. Accordingly, the Reserve Bank of India (RBI), too, would amend the Foreign Exchange Management Act (Fema) to include the new definition.

Besides, in what could be seen as a revamp of the FDI policy, a committee on ‘improvement of capital flows - FDI and portfolio’, under the finance ministry, has decided to bring rules to allow foreign investment in consultancy and advisory services for the construction & development sector. It has also allowed warrants and partly paid shares to be considered as instruments for FDI and imposed new equity limits for Indian investors in construction & development joint ventures, among other things.

The finance ministry has also asked RBI to immediately notify press notes 2, 3 and 4 of 2009 that specify the method to calculate foreign investment and the requirement of an approval from the Foreign Investment Promotion Board for transfer of control in companies with sectoral caps. These notes had become controversial as these said foreign investment through an investing Indian company would not be considered for calculation of indirect foreign investment if an Indian company was ‘owned and controlled’ by a resident Indian citizen.

But, if an investing company was owned or controlled by a non-resident entity, the entire investment by the investing Indian company would be considered as indirect foreign investment. However, there were some exceptions, especially in relation to 100 per cent subsidiaries of investing companies.

Earlier, RBI had proposed doing away with sectoral caps, or administering those through sectoral regulators concerned. The finance ministry had said that would require modification in the definition of ‘control’, besides notification of press notes 2, 3 and 4.

The Companies Bill says ‘control’ should include “the right to appoint a majority of directors, or to control the management or policy decisions excercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholder agreements or voting agreements or in any other manner”.

In the construction & development sector, there are separate minimum capitalisation norms for JVs and wholly owned subsidiaries. However, under the new rules, to qualify as a JV, an Indian investor must have a share of at least 25 per cent.

Also, to protect foreign companies’ investments, the government is planning to allow FDI only through the escrow mechanism.

Besides, under the new rules of issuance of warrants for foreign investors, listed companies would have to follow the regulations of the Securities and Exchange Board of India, while unlisted ones would issue warrants with 25 per cent upfront payment and conversion within 18 months. For issuance of partly paid shares to foreign investors, both listed and unlisted firms would have to make 25 per cent upfront payment and the shares would have to be made fully paid-up within 18 months.

Plugging the holes

  • The definition of ‘control’ will be brought in sync with that in the Companies Bill
  • The rights of a person or company, especially foreign, with controlling stake in an Indian entity will be clearly defined
  • RBI will, accordingly, amend Fema to include the new definition
Surajeet Dasgupta & Vrishti Beniwal in New Delhi