Finance ministry toughens stand on indirect FDI

All interests be included in calculating the effective foreign holding in companies.

Taking a firm stand on indirect foreign investment, the finance ministry has said that all interests of foreign entities "" control, economic benefits and shareholding ""be included in calculating the effective foreign holding in a company.

This view, favoured by the Department of Economic Affairs, has been forwarded by the finance ministry to the Department of Industrial Policy and Promotion (DIPP), under the commerce ministry, according to the finance ministry.

The DIPP, which is the nodal body for framing foreign investment regulations, had earlier suggested that indirect foreign interest in an Indian company should be reckoned only if it is owned more than 10 per cent by another Indian company, which has foreign shareholders.

The finance ministry is of the view that all interests "" direct and indirect "" should be taken into account and that there should not be any threshold for calculating total effective foreign shareholding in a company.

Indirect foreign holding is the interest of a foreign company in an Indian company through another Indian entity. As per the Companies Act, control over the management of a company is derived through the appointment of directors.

Similarly, economic benefits defined as the share in profits and/or revenue sharing can overrule the shareholding interests under separate agreements.

At present, indirect foreign holding in an Indian entity is calculated under a two-pronged method. Under this, the foreign company should at least have 50 per cent plus one share in an Indian company, which in turn should have at least 10 per cent stake in another Indian company in which the indirect foreign holding is sought to be calculated.

The sources are of the view that in this case a foreign company can have more than half of the directors in the Indian company which in turn proposes to invest in another Indian firm.

Thus, management control can be manipulated through indirect foreign holding. The finance ministry's recommendation opposes this policy of DIPP on indirect foreign shareholding.

The issue of calculating indirect foreign equity in Indian companies in sectors subject to foreign equity caps has gained prominence in the recent past with a number of investment proposals ""including Vodafone-Hutch Essar, ICICI Bank's proposed dilution of 24 per cent in its financial services holding company, and Global Broadcast News among others "" coming under the spotlight at the FIPB.