Date: February 14, 2009
Ref. No. MPML/PMS/216/2009
Foreign money for all now
EVERY sector of the Indian economy has effectively been thrown open to foreign investment, thanks to the revised norms for computation of foreign holding in an Indian company issued by the government on Friday. For example, organized multi-brand retail, hitherto forbidden territory for foreign investors, now stands prized open. "This opens the way for front door entry of foreign direct investment in organized retail."
"According to the new guidelines, the government would count investments by an Indian-owned company into any company, whichever sector it may be operating in, as Indian equity."
New FDI norms introduce idea of beneficial ownership
ANY company will be deemed Indian owned if foreigners have less than 50% beneficial ownership in the company and if foreign investors do not control it.A press note prepared by the department of industrial policy and promotion (DIPP) makes one significant departure from the press release issued on Thursday. This change is to bring in the concept of 'beneficial ownership' while determining whether a company is owned by foreigners or not. As per the press note, "an Indian company may be taken as being owned by non-residents entities, if more than 50% of the equity interest in it is beneficially owned by non-residents".
Now, the Companies Act does not define beneficial ownership. But it is commonly understood to mean cumulative ownership arising from direct and indirect holding in a company. If this understanding holds, the press note marks an improvement on Wednesday's press release, which had done away with any concept of indirect foreign ownership through an investing company that is not majority-owned by foreigners.
However, points out a merchant banker, identifying beneficial interest would be next to impossible in widely held and listed companies, in which holdings by foreign institutional investors, as well as, by Indian-owned companies with minority foreign stakes, keep changing.
Nor do the guidelines address, said the merchant banker, the case of an Indian resident warehousing shares on behalf of a foreign investor. It is perfectly legal for a foreign entity to give 51% stake in, say, Stalking Horse Pvt Ltd, to an Indian resident willing to act on the foreigner's behalf, for a consideration next to nothing, and for then Stalking Horse to invest in other companies, using the funds brought in by the foreign entity, as an Indian investor.
Commerce and industry minister Kamal Nath addressed the press on Friday and sought to explain that the revised norms bring transparency and uniformity to assessment of foreign investment, based on control and ownership. All forms of foreign investment - FDI, investment by FIIs, non-resident Indians, American Depository Receipts, Global Depository Receipts, Foreign Currency Convertible Bonds, and convertible preference shares -would be taken into account, he clarified. Investments by any company, which has a majority foreign stake, will be considered entirely as FDI. The only exception will be when a joint venture company creates a whollyowned subsidiary in India. In that situation, the foreign stake in the subsidiary company will be considered as equal to the stake in the holding company.An Indian company, according to the press note, would be deemed controlled by nonresident, if foreign entities have the power to appoint majority directors on board.
However, if an Indian company intends to transfer ownership or control to a foreign company, it would have to seek foreign investment promotion board's nod in restricted sectors such as telecom, defence production, air transport services, banking, broadcasting.
The government has also made it mandatory for companies to provide full details about beneficial ownership to the FIPB while seeking its approval. According to the press note, companies would have to seek government approval in cases where shareholders have agreements affecting appointment of board of directors or voting rights, or creating voting rights disproportionate to shareholding. The approving authorities will consider these shareholder agreements before determining ownership and control.
In all sectors attracting sectoral caps, the balance equity, which is equity beyond the prescribed sectoral cap, would specifically be beneficially owned by resident Indians or Indian companies, the government document says.
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.
(Source: ET)