Change in definition of control in FDI policy to be prospective: Sharma

The Companies Bill has also given new definition of a group company, Foreign Exchange Management Act and Foreign Trade Policy

The Ministry of Commerce & Industry has clarified its stand to its finance counterpart — any change being contemplated by the latter in the definition of ‘control and ownership’ of an Indian company for foreign direct investment (FDI) purposes has to be made “prospectively”, so as to not to hit investments by Indian companies in their downstream businesses.

Both ministries have locked horns on the definition of ‘ownership and control’ in Indian companies with foreign majority stakeholders. In 2011, the Cabinet put the issue to rest---it had said investments by Indian companies in which foreign ownership was more than 50 per cent would be treated as foreign investment for downstream investment purposes. This definition was similar to what the Department of Industrial Policy and Promotion (DIPP), under the commerce ministry, had suggested in a discussion paper in 2011.

For FDI across all sectors, the finance ministry has finally decided to accept the definition of ‘control and ownership’ prescribed in the new Companies Bill, 2012. If the new definition is approved, Indian-owned and controlled companies that have more 51 per cent foreign shareholding can make downstream investments in sectors that have FDI caps, without the government’s approval.

It is expected Commerce, Industry and Textiles Minister Anand Sharma would discuss the issue with Finance Minister P Chidambaram by the end of this month.

“From the time the Cabinet finalised the decision till now, there have been a few developments. The issue is which definition to adopt…We have made it very clear whatever changes take place would be done prospectively. They cannot change the existing definition now...because we have Indian companies that have entered into joint-ventures, partnerships…investments have come into India based on that definition. There is no question of revoking the Cabinet decision. The existing definition will continue to prevail with effect from March 2009 till the time the new decision comes into place,” Anand Sharma told Business Standard.

The Companies Bill has provided new definitions of a group company, the Foreign Exchange Management Act and the Foreign Trade Policy.

The finance ministry and the Reserve Bank of India have sought clarity on the issue and want to align the definition of ‘control’ in the FDI policy with the proposed definition in the new Companies Bill to get more investments into the country. During his Budget speech, the finance minister had clarified he and his team would amend the definition of ‘FDI’ and ‘FII (foreign institutional investment)’ to remove ambiguity and to adhere to the international definition.

The Companies Bill seeks to give more powers to foreign owners. It defines ‘control’ as the “right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner”.

According to the finance ministry, this would put to rest the imbroglio surrounding downstream investment by Indian companies. By changing the definition, Indian-owned but foreign-controlled companies would be allowed to make investments in sectors that have caps on FDI. Currently, this is not allowed. For instance, if ICICI Bank, which has 77 per cent foreign ownership, decides to invest in the telecom sector, the 74 per cent FDI limit in the sector would be applicable.

In February 2009, DIPP had issued Press Notes 2, 3 and 4, which stated companies with foreign investment of more than 51 per cent would be classified as foreign firms. However, ICICI Bank and HDFC Bank (foreign stake in the two banks was 63 per cent and 74 per cent, respectively) maintained they were Indian banks.