Amidst debate over control of Jet Airways post UAE's Etihad buying stake, the RBI on Thursday notified FDI guidelines defining control of a company, saying that a firm will be said to be controlled by non-residents if they have powers to appoint majority of the directors.
The notification of Press note 2 and 3 of the Department of Industrial Policy and Promotion (DIPP), which has been pending for the last four years, will be used to ensure that foreign direct investments comply with FDI ceilings and other norms.
The press notes provides definition of 'owned or controlled’, a term which is essential to determine whether a company is a foreign firm or a domestic entity.
As per the Press Notes, a company is considered as "controlled" by resident Indian citizens if the power to appoint a majority of the directors on its board is held by Indian companies and citizens.
On the other hand, a company is considered as 'owned' by resident Indians if more than 50 per cent of the equity is held by the entities in India. Similarly, it would be a foreign company, if over 50 per cent of the equity is held by a non-resident.
It further said as regards investments made between February 13, 2009 and the date of publication of the notification, Indian companies are required to intimate, within 3 months the detailed position where the issue of shares or downstream investment is not in conformity with the regulatory framework now being prescribed.
"RBI shall consider treating such cases as compliant with these guidelines within a period of 6 months or such extended time as considered appropriate by RBI in consultation with Government of India," it said.
As per the norms, investment in Indian companies can be made by both non-resident as well as resident entities. Any non-resident investment in an Indian company is direct foreign investment. Investment by resident Indian entities could again comprise both resident and non-resident investments.
Thus, such an Indian company would have indirect foreign investment if the Indian investing company has foreign investment in it. The indirect investment can also be a cascading investment, that is through multi-layered structure.
Various ministries and departments including market regulator SEBI have raised concerns about the ultimate control of Jet once the deal with Etihad goes through. Experts said that the RBI's notification will lead to increase in reporting requirement for an investor.
"They have increased the reporting requirement for investments made between February 2009 till now and also the scrutiny of compliance of Press Note 2 and 3," Head of Tax and expert on FDI with corporate law firm Amarchand & Mangaldas Krishan Malhotra said.
DIPP, which deals with FDI related matter, issues provisions in the form Press Notes or consolidated circulars.
The RBI also said in sectors with caps, including, defence production, air transport services, ground handling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecommunications and satellites, Government approval or FIPB approval would be required in all cases.