Broad consensus is emerging within a Group of Ministers (GoM) chaired by finance and external affairs minister Pranab Mukherjee on a proposal seeking comprehensive changes in the foreign direct investment (FDI) policy. This includes scrapping automatic approval in sectors that have FDI limits and in which ownership or control is shifting to a foreign company, and a new definition for calculating indirect foreign equity.
The contours of the proposal were discussed last Tuesday after the department of industrial policy and promotion under the commerce ministry submitted a revised proposal incorporating concerns expressed by the ministries of telecom, home and information and broadcasting. The GoM has agreed to meet again though the dates have not been finalised for the next meeting.
Under the new proposal, clearance from the Foreign Investment Promotion Board (FIPB) will be mandatory in all cases in which ownership or control (or both) of an Indian company is being transferred to a foreign company through acquisition or merger or in a new company in which the FDI is accompanied by foreign control and majority ownership.
Current policy allows automatic approval for companies in sectors with FDI limits — such as telecom, insurance, and private banking — to bring in foreign equity. This means these companies merely have to take permission from the RBI to transfer funds and do not require prior approvals. New companies also do not require FIPB permission as long as the foreign investment is within the ambit of the automatic approval policy.
Sectoral caps are currently imposed on defence production, air transport services, ground handling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, insurance and telecommunication.
In telecom, for instance, automatic approval is allowed for FDI up to 49 per cent, though the sectoral FDI limit cap is 74 per cent. In insurance, automatic approval applies to FDI up to 26 per cent, in air transport services up to 49 per cent and in private banking up to 74 per cent.
The guidelines also propose to ensure that all sectors with FDI limits will have the remaining equity owned by Indians. It also proposes to make it mandatory for ownership and control to rest with Indian shareholders in companies in which the sectoral limit is lower than 49 per cent. The Indian shareholder must have at least 51 per cent.
A resident Indian or a foreign entity is considered an owner of a company if it has a more than 50 per cent shareholding. It is considered in "control" of the company if it has the power to appoint a majority of the directors in the company as well as direct their actions.
The primary objective of these guidelines is to ensure that ownership of Indian companies in sensitive sectors like telecom and broadcasting is not transferred to foreign firms.
The GoM has also worked out three ways to calculate indirect foreign equity in a company.
For instance, if company A in which foreign investment is less than 50 per cent invests in a company B, indirect FDI will be calculated as zero. If, however, company A has foreign investment which is more than 50 per cent and it invests 26 per cent in Company B then the entire 26 per cent will be calculated as indirect foreign investment.
Again, if company A has foreign investment of 75 per cent and decides to invest 100 per cent in company B, making it into a fully owned subsidiary, only 75 per cent will be calculated as indirect foreign equity.
Current norms use a proportionate method to calculate indirect foreign equity. Under this method, if company A has foreign investment of 50 per cent and invests 26 per cent in company B, foreign indirect investment will be calculated at 13 per cent. There are other methods of calculating indirect foreign investment which are applied to companies in insurance and defence production.
The new norms will be outlined in a single Press Note. Currently, these guidelines are set out in different Press Notes for different sectors. A press note is a set of guidelines issued by the DIPP on details of the FDI policy.
Sources said the GoM has reached a consensus on three key issues. One, that the guidelines for calculating indirect foreign equity should be simple and homogenous across all sectors. Two, the guidelines should migrate to a system that recognises both the concept of ownership and management control and not just one of them. And three, guidelines should not result in management control being passed on from Indian to foreign companies in cases in which the current policy does not envision such an outcome.
In the first meeting of the GoM on December 23, the telecom ministry and the information and broadcasting ministry had raised concerns of sectoral caps being breached owing to the pro rata method of calculating indirect foreign investment. The home ministry also said in sectors with FDI limits, the remaining equity should be with Indian citizens and safeguards need to be put in place against contraventions in ownership patterns.
