Beneficial ownership threshold under FEMA could be kept open-ended

Issue deferred as ministries fail to reach consensus over threshold

The definition of “beneficial ownership” for Chinese foreign direct investment (FDI) in India might be kept open-ended in view of no consensus on this.
 
Policymakers are of the opinion that placing a threshold on investment would leave the field open for overseas investors, particularly from China, to alter their investment structures, short-circuiting the FDI approval process.
 
“Several rounds of discussion and deliberation have been done. The ministries, inc­luding the Ministries of Fin­ance and Commerce, have fai­led to reach a consensus on setting a cap on investment from seven neighbouring nations, including China. It is also being argued that giving a definition could be misused by overseas investors to escape scrutiny,” said a source in the government, privy to the discussion. Sources say the ministries and departments concerned are at odds on keeping the threshold lower at 10 per cent, in line with the rules on significant beneficial ownership under the Companies Act, 2013. Some of them have been pitching for keeping it at 25 per cent for companies and 15 per cent for investment coming through partnerships (as defined under the Prevention of Money Laundering Act). Hence, the matter was deferred again, a source said.

 

During the discussion between the ministries held two weeks ago, various trends in capital raising by Chinese players and the role of venture capital (VC) and private equity funds came up.
 
“There are lots of instances where deals have taken place through VC. The large number of VC deals makes it difficult for India to determine what constitutes beneficial interest,” said the source cited above.
 
On April 18, India tightened its FDI policy for countries with which it shares land borders, by putting investment from them on the approval route.
 
On April 22, the Centre had issued notice under the Foreign Exchange Management Act, stating that investment from the seven nations must seek approval from the government.

 
Under it, a Chinese investor holding one share in the investing entity is a beneficial owner.
 
Industry has made several representations on this since May, seeking clarity on beneficial ownership, but to little avail owing to border tensions.
 
Experts say deferment would result in delay in business plans of overseas entities. 
 
Rajesh Gandhi, partner, Deloitte India, said, “If the threshold for beneficial ownership is specified, investors will get clarity and portfolio investors will be able to continue investing smoothly. Otherwise, there would be uncertainties and that would delay business plans.”
 
The government, however, has started looking at Chinese investors proposing to buy less than 10 per cent in companies in non-sensitive sectors.

 
“The government’s approach in keeping the definition of beneficial ownership vague is an indication of its apprehension that investors will take advantage of creative structures to escape the ambit of the new provisions. Unfo­rtunately, in the absence of clear directives as to what constitutes beneficial ownership, overseas entities (including listed companies and funds) based out of countries not sharing a land border with India but having a minuscule shareholding/interest from China-based entities are also being covered under this,” said Atul Pandey, partner, Khaitan &Co.
 
He further said foreign investors/funds had been adversely affected and a number of investment proposals which would otherwise have concluded months ago were stuck.

 
“Considering that the government has come out with beneficial ownership norms for other enactments (most recently, in respect of restrictions on public procurement), I do not see any reason for the government to hold back clarification on beneficial ownership,” added Pandey.