In an attempt to rationalise the treatment of indirect foreign equity ownership in joint venture broadcasting, banking, insurance and telecom service companies, the Department of Industrial Policy and Promotion (DIPP) has suggested a significant relaxation in the definition of indirect foreign shareholding.

The DIPP, the nodal agency for foreign equity policy norms, has proposed that foreign investment routed through Indian companies that own up to 10 per cent in an Indian entity should not be considered foreign holding.

The relaxation, however, will only be applicable provided the Indian company formally declares that it is not acting in concert with other foreign investors in the joint venture.

In effect, if the shareholder is acting in concert or the level of this indirect ownership crosses 10 per cent, the government will take this shareholding into account on a proportionate basis as foreign equity.

The relaxation will not apply if the Indian company holding more than 10 per cent shares is a direct or indirect subsidiary of a foreign company.

The DIPP, which comes under the ministry of commerce and industry, has circulated these suggestions for discussion of secretaries of key ministries including telecom, information and broadcasting among others. Once finalised, the guidelines will be put up for Cabinet approval.

The rationale for a 10 per cent cut-off for determining indirect foreign equity levels in Indian joint ventures is that the Companies Act, 1956, specifies that any shareholding below 10 per cent does not entitle the investor to ownership rights. At 10 per cent and above, a shareholder can call for an extraordinary general meeting.

The second crucial equity level at which a shareholder secures specific ownership rights is 51 per cent, when he becomes a majority owner and acquires the status of a subsidiary of a holding company.

The issue of calculating indirect foreign equity in Indian companies in sectors subject to foreign equity caps has gained prominence in the recent past with a number of investment proposals � including Vodafone-Hutch Essar, ICICI Bank's [Get Quote] proposed dilution of 24 per cent in its financial services holding company, and Global Broadcast News [Get Quote] among others � coming under the spotlight at the Foreign Investment Promotion Board (FIPB), the inter-ministerial body that approves overseas investment proposals.

Indirect Gains

• Foreign investment routed through Indian companies with less than 10 per cent should not be considered foreign holding
• Applicable only to Indian companies that declare they are not acting in concert with foreign investors in the joint venture
• Suggestion circulated to key ministries ahead of Cabinet consideration