Govt to alter FDI norms

Bid to plug loopholes that surfaced in Hutch Essar case.

Wiser from its experience in the Hutchison Essar shareholding tangle, the finance ministry is working on a fresh set of guidelines for foreign direct investment (FDI) to clearly define what constitutes indirect holding, beneficial interest and other forms of economic control. The exercise is aimed at plugging loopholes and ensuring that companies follow both the letter and spirit of foreign investment rules.

The new guidelines are being prepared by the Foreign Investment Promotion Board (FIPB) under the department of economic affairs (DEA). Three key departments "" economic affairs, commerce and industry "" have supported the need for an overhaul. A key commerce department official has gone on record as saying that an analysis of the Hutchison Essar holding pattern "made it clear that legally within the system, there can be outside control with the holding being Indian and therefore correct signals must be drawn from this".

The immediate provocation for this move was the Vodafone International Holdings B V proposal, cleared with conditions on May 7, asking the government to take note of its acquisition of 51.96 per cent in Hutchison Essar Ltd, India's fourth-largest mobile service provider. The key issue raised here was whether Hutchison Essar had violated the 74 per cent FDI limit for telecom services due to the financing and holding arrangements for 15 per cent equity of the company by its managing director Asim Ghosh, Max group chairman Analjit Singh and financial institutions IDFC and SSKI.

Another issue that came under scrutiny was whether the beneficial interest of this 15 per cent holding had been transferred to Hutchison Essar's former owners, Hong-Kong-based Hutchison Telecom International Ltd (HTIL), which had extended credit support to the Indian shareholders to acquire their shares.

The department of economic affairs took the stance that the Indian shareholders of the 15 per cent equity "cannot dispose of their shares in any manner except to HTIL as and when the law permits them to do so and at a fraction of the actual value of the shares". The department also said the shareholding should be treated as "benami" (that is, as proxy shareholding). These views, however, were in variance with those of the law ministry that broadly stated that the shareholding pattern conformed to the letter of the law.

The FIPB says the issue of indirect holdings needs to be clarified since it impacts all sectors that have FDI limits.

"As far as the level of direct and indirect Indian holdings is concerned, it is a matter of concern in all sectors that have sectoral caps," an industry department official said. Currently, of the 34 sectors that are regulated under foreign direct investment norms, 100 per cent FDI is permitted in 14.

Six sectors including telecom services allow 74 per cent FDI. Another five, including broadcasting services, allow 49 per cent. Another five sectors including print and defence permit only 26 per cent. Four sectors are barred from FDI "" atomic energy, the lottery business, gambling and betting and retail (except single-brand retailing where 51 per cent FDI is allowed).