It is never too late to express appreciation or criticise a policy change, even if it’s a month down the line. Press Note 4/2009 (PN 4/09) deserves a “thumbs up” for having done away with Press Note 9/99 (PN 9/99), which had posed, perhaps unintentionally, a roadblock to FDI. To understand this better, one has to revert to Press Note 3/97 (PN 3/97), which was intended to facilitate 100 per cent foreign “holding” companies to be set up, under the auspices of the FIPB.
In fact PN 3/97 was intended to enable the FIPB to consider and deal with FDI proposals, in the wake of the New Industrial Policy. “Holding” activity was recognized as that of an investment company - now defined in PN 4/09, which would, other than making all subsequent and downstream fund infusions, be engaging in infrastructure and consultancy proposals, not activity, and provide technology.
PN 3/97 was intended to permit Holding Companies to make downstream investment under the FIPB route. But with the transition to the FEMA regime, and the automatic route opening up, foreign owned business enterprises in India started investing, often out of their own profits.
The ostensible objective of PN 9/99 was to “simplify downstream investment procedures, introducing the concept of “holding-cum-operating companies”
Unfortunately, the FIPB took a stand that all investments, notwithstanding the availability of the automatic route, and regardless of the percentage of FDI in the operating company, or that of the downstream investment, had to seek FIPB Approval. This was applied retrospectively, which then meant post facto approvals and approaching the Reserve Bank for compounding the delay.
Press Note 2 of 2009 (PN 2/09) created major confusion in defining “Investing Company”, and by treating “a Holding Company” to have the same meaning as under the Companies Act (“Act”), which only recognises the one-step up and down holding-subsidiary relationship in terms of board control and shareholder majority.
Investing Company as defined in PN 2/09 is an Indian Company makingequity/preference/CCD investment into another Indian Company (sic), while in PN 4/09 it is redefined as an Indian Company i.e. a company incorporated under the Act, holding only investments in another Indian Company, directly or indirectly, other than for trading. While this not only provides lucidity, it also reinforces the FII/FDI distinction, but does not clarify whether this prohibition will apply to venture capitalists and private equity players.
Foreign Investment in
Investment Companies would not only have to abide by sectoral conditions, and caps, but also seek FIPB approval. This is intended, presum-ably by implication, to necessarily exclude prohibited activities such as multi-brand retailing and agriculture, without specifying the same, but an upfront clarification would have been better.
Operating company is defined as an Indian Company, undertaking operations in various economic activities and sectors. Operating Companies are spared from any compliances or approvals, except the relevant sectoral conditionalities. Operating-cum-Investing Companies are retained in PN 4/09 — but they have been exempted from the prior approval process and now have to notify SIA/ DIPP/, FIPB of their downstream investment within 30 days of such investment being made.
PN 4/09 also envisages a residual criteria for non active companies, defined as “Companies having no Operations”, nor making Downstream Investment and requiring FIPB approval at any stage for FDI even if combined with operational activity, regardless of the amount of infusion.
Under the MCA online incorporation regime, and Applicants have to provide the main object provision upfront ,the proposed activity has to be indicated in the name itself even for name clearance, Main Objects are restricted to two or three, so there being adequate inbuilt checks, its not clear why this stringency is imposed.
Though foreign exchange infusions though no longer severely regulated, they are certainly monitored, in which the proximate source and character are not difficult to trace. The language suggests that all dormant companies, once they receive foreign funds for investing further, will clearly be treated as investment companies, regardless of stated sectoral conditionalities and activity.
The proof of the pudding lies in its eating, so the moot questions are — do these policy changes achieve the prime concerns, i.e., encouraging
FDI, while effectively protecting the security sensitive sectors with national interests etc.? Certainly the scope of net economic ownership through indirect holdings has been enhanced, in the hope of incentivising volume of investments. However, having said that having advised foreign investors in diverse entry strategies, on balance, my gut feel is that they will not cede on control and veto rights that easily.
Kumkum Sen is a Partner at Rajinder Narain & Co., and can be reached at kumkumsen@rnclegal.com
