Centre approves new definition of 'control' in FDI

Three days after the government approved the $379-million Jet-Etihad deal, it changed the definition of 'control' in the context of foreign direct investment (FDI) policy. The new definition will empower the shareholders' agreement or voting agreements and will be with prospective effect.

As approved by the Cabinet on Thursday 'control' will be defined as "the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholder agreements or voting agreements." This was done in order to bring parity with the definitions that are given under the guidelines of Securities and Exchange Board of India and Companies Bill 2012, commerce and industry minister Anand Sharma said.

"The revised definition of control will expand the scope of the term to cover management and policy decisions, shareholding, management rights, shareholders agreements. It will also be in line with definition provided in the Substantial Acquisition of Shares and Takeovers Regulations, 2011 and the Companies Bill, 2012," Sharma said.

After the cabinet's approval on Thursday, the Reserve Bank of India (RBI) will notify the new definition, thereby repealing the earlier notification. In the interim, the old definition of 'control' as given in the FDI policy will be valid.

The FEMA guidelines will also be changed on definition of 'control and ownership.'

According to the present FDI policy, a company is said to be 'controlled' by an Indian resident if the Indian investor holds more than 51 per cent stake and can appoint the majority directors in the firm.

Officials told Business Standard, that as far as calculation for FDI is concerned, under the new rules, an Indian company will be considered a foreign entity if the majority stake in the firm is held by foreign investors or is foreign controlled. Any investment by such a company will also be considered as foreign investment.

The new definition, sources said, will help in checking entry of indirect foreign investments into those sectors where there are certain thresholds.

Earlier this week the government approved $379 million deal between Jet Airways and Etihad where the Foreign Investment Promotion Board (FIPB) under finance ministry upheld the shareholders' agreement as the basis of ascertaining whether the Abu Dhabi-based airline, which has a minority stake, will have the power in running Jet.