The Foreign Investment Promotion Board has made it clear that Press Notes 2 and 4 issued in February 2009, which changed the way indirect foreign equity would be treated in calculating foreign investment levels in Indian corporations, cannot take effect retrospectively for proposals before the board.
This clarification arose after the nodal approval agency for foreign direct investment proposals recently rejected applications by direct-to-home entrant Bharti Telemedia and Tata Teleservices to waive fines incurred for not taking permission for indirect foreign investment in their companies last year.
The press notes of 2009 state that foreign investment routed through an Indian company owned and controlled by resident Indians will not be taken into account while calculating the total foreign direct investment or FDI.
An Indian owned company is defined as one in which resident Indians or Indian companies have more than a 50 per cent beneficial stake and control means the power to appoint the majority of directors.
In January this year, FIPB had given Bharti Telemedia retrospective approval for indirect foreign holding via Bharti Airtel, subject to a fine that would be determined by the Reserve Bank of India.
In 2008, Bharti Airtel invested 40 per cent in Bharti Telemedia. Since the telecom service provider has a 21.6 per cent foreign holding, the pro-rata foreign holding in Bharti Telemedia amounted to 8.64 per cent, which the FIPB said required its approval. This was duly given in January after the deal was struck, hence the fine.
After Press Notes 2 and 4 were issued in February, Bharti Telemedia put in a fresh application saying that it was not required to pay the fine because under the new rules, the indirect foreign component was routed through Bharti Telecom, which is owned and controlled by Indians.
In the case of Tata Teleservices, NTT DoCoMo was given approval to acquire 27.3 per cent stake in the company in January this year . The approval, however, was subject to Tata Teleservices paying a fine. This was because FIPB had contended that even before DoCoMo's investment, Tata Teleservices had a foreign investment of 9.98 per cent from Temasek Holdings and had made downstream investments in Virgin Mobile India, Tata Teleservices Maharashtra and Tata Internet Services without FIPB permission.
A few months ago, Tata Teleservices put in a fresh application saying under Press Notes 2 and 4 Tata Teleservices was a resident Indian company and, therefore, did not need to pay a fine.
At its meeting on June 19, FIPB rejected both applications saying the deals were structured before the two press notes were issued.
The deals, FIPB said in a note, "cannot retrospectively change the legal consequences of acts committed or legal status of facts and relationships that existed prior to their enactments. That is why the board has taken a conscious decision to recommend the proposal for rejection".
Significantly, the Department of Industrial Policy and Promotion under the commerce ministry had approved both proposals.
Both Bharti Airtel and Tata Teleservices said they had not received any communication from the FIPB so they could not comment.
A TTSL spokesperson, however, added: "The transaction has already been completed and the foreign investment received in March 2009."
The press notes have been the bone of contention between Department of Economic Affairs in the finance ministry and DIPP. DEA has said the norms would violate sector-specific foreign investment limits, a view it shares with the RBI.