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The proposal, which has to be cleared by the Cabinet Committee on Economic Affairs (CCEA), has suggested the definition of “control” be expanded to include the control exercisable through management and policy decisions, management rights, and shareholder agreements of an Indian entity.
Currently, a company is considered “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. It was felt this definition was not comprehensive enough to cover all possible ways in which “control” was exercised in corporate entities. The note says a foreign company could avoid this test if it did not appoint a majority of the directors but otherwise exercised control in indirect ways, such as lien over voting rights or shareholder agreements (which also confer control).
Under the expanded definition, according to the note circulated to various ministries, “control shall include the right to appoint a majority of directors or to control the management or policy decisions, including by virtue of their shareholding or management rights or shareholder agreements or voting agreements”. The new definition would take effect prospectively from the date the press note containing it is notified. In the interim, the older definition will be valid. The Reserve Bank of India (RBI) will prepare the detailed notification to give effect to the changes.
The new definition is in sync with those in the Companies Bill, 2012, and the Sebi Takeover Code; the Companies Act, 1956, does not clearly define ‘control’.
Though the note does not use the word “effective control”, the new definition means the Jet-Etihad deal would have to be restructured. The Foreign Investment Promotion Board (FIPB) had not cleared the deal because the government wanted more details of ‘effective control’ and ownership.
Though Etihad had picked only a 24 per cent stake in Jet, its say in the management would be substantial. Sources say the shareholder agreement between Jet and Etihad has been worked out in a way that the Abu Dhabi-based carrier gets a substantial role in decision making. The two airlines, working on a new shareholders agreement to address the concerns of the government, has submitted a revised proposal to FIPB. However, if the report of the Arvind Mayaram committee on foreign direct investment cap is implemented, the deal could go through even in its present form, as it recommends that 49 per cent FDI be allowed under the automatic route and the civil aviation rule on retaining effective control with Indians be scrapped.
The panel has recommended that up to 49 per cent FDI be allowed to come through the automatic route, after which it could be vetted by FIPB. The panel has also suggested that up to 74 per cent FDI be allowed in the sector.
Ministries have been asked to respond by June 29, after which the note will be forwarded to CCEA.
After clearance, RBI will notify the long-pending Foreign Exchange Management Act (Fema) rules for Press Note two and three of 2009.
The norms under Fema would enable the implementation of the FDI policy of 2009, circulated through that year’s Press Notes 2 and 3. These notes, incorporated later in the consolidated policy, became controversial as these said the entire downstream investment through an investing Indian company would be considered for calculation of indirect foreign investment if an Indian company is “owned and controlled” by non-residents, and sectoral FDI caps would apply on those. However, there were some exceptions, especially in relation with 100 per cent subsidiaries of investing companies.
The press notes suggested that FDI, investment by foreign institutional investors, qualified foreign investors, non-resident Indians, those through American depository receipts or global depository receipts, foreign currency convertible bonds, compulsorily and mandatorily convertible preference shares and fully, compulsorily and mandatorily convertible debentures be counted to calculate indirect foreign investment in a firm.
In this regard, a firm owned by non-residents would mean an Indian firm where over 50 per cent of capital is beneficially owned by foreigners.
ALL ABOUT CONTROL
Current definition: Control rests with one who has the power to appoint a majority of directors
New definition: Includes control exercisable in the form of management or policy decisions through management rights or shareholder agreements of an Indian entity
The way forward: The new definition needs to be approved by CCEA before RBI can notify Fema rules to execute the two relevant press notes of 2009
Implication: Jet-Etihad deal would have to be restructured and brought in sync with the broader definition of control. But it may go through in its current form if the Arvind Mayaram panel report is implemented
