The last edition of this column commented on the ambiguity on pricing of convertible instruments created by the “Consolidated FDI Policy” — a re-stated policy document on foreign direct investment (FDI) released by the government of India superseding all prior press notes, circulars and clarifications hitherto issued.
The well-intentioned consolidation of policy has now created another significant area of ambiguity. The blame for this one is arguably not attributable exclusively to the govern-ment. It is to be shouldered equally by practitioners and industry — for seeking approval despite none being required.
The section in the Consolida-ted FDI Policy that deals with the policy for downstream investments i.e. investments by Indian compa-nies that are majority-owned by foreign investors or controlled by foreign investors, contains a state-ment that reads: "The 'guiding principle' is that downstream investm-ent by companies 'owned' or 'control-led' by non resident entities would require to follow the same norms as a direct foreign investment i.e. only as much can be done by way of indirect foreign investment through downstream investment in Para 4.1 as can be done through direct foreign investment and what can be done directly can be done indirectly under same norms."
On the face of it, one should have no quarrel with the principle — circumventing the intent behind the law is not good. However, the usage of colloquial language in policy (“only as much can be done…”), coupled with the propensity of practitioners to keep going to government even when the government does not want to be approached, has led to a strange situation.
Applications have been made to the government seeking approval for Indian companies to effect legitimate onshore transactions between Indian companies merely because one of the Indian companies is foreign-owned or foreign-controlled. To make matters worse, the government has refused to "approve" such applications on the basis that a foreign investor could not have done what the foreign-owned Indian company sought to do - all such action based on mis-reading the colloquial statement in the Consolidated FDI Policy.
For example, under Indian law, foreign investment in Rupee-denominated optionally conver-tible preference shares is regulated as if it were foreign debt. Regula-tions governing foreign debt impose restrictions on end-use of funds, borrowing costs, source of borro-wing etc., Now, by the interpre-tation of the imprecisely worded “only as much can be done…,” language, if government approval were to be sought for an Indian comp-any to invest in redeemable pref-erence shares of other Indian companies, and the government were to reject the request, it would only lead to a bizarre confirmation of the fears and doubts in the minds of even Indian companies and their advisors.
Such a convoluted and strained interpretation of policy would lead to serious unintended consequences. For example, Indian companies with foreign ownership would then be unable to give any credit or inter-corporate loan to any other resident Indian party if such transactions had to comply with regulations governing foreign debt. So also, a foreign-owned Indian company would not be able to invest in warrants of another Indian company. Equally, a foreign-owned Indian company investing even a minority stake in an Indian non-banking financial company (NBFC) would lead to the NBFC having to meet minimum foreign capital inflow requirements imposed on FDI in the NBFC sector. The list of absurd consequences one can envisage would be endless.
When the draftsmen of the Consolidated FDI Policy wrote “only as much can be done by way of indirect … as can be done through direct…” they would have meant that a foreign investor should not be allowed to take a stake in an Indian business sector where investment is completely prohibited. It could have never been their intention to treat an Indian company as a foreign company even for every domestic purpose. Treating every activity of a resident Indian company as if it were an activity of a foreign investor, merely because its capital is majority-owned by a foreign investor, would upturn the very basis of exchange controls and FDI policy that has been in place for two decades.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
E-mail: somasekhar@jsalaw.com
