DIPP rejects curbs on capital flow

If company defined as controlled by Indians as in Press Note 2, clear its further investments.

The Department of Industrial Policy and Promotion (DIPP) under the ministry of commerce and industry has disagreed with the Union finance ministry’s view that there is need to regulate investment in sectors with foreign investment caps in respect of those companies which despite being technically “owned and controlled by Indians” as defined in Press Note 2, still leave scope for indirect foreign control.

The control, finance ministry says, can be established either through provisions enshrined in the shareholders agreement or through super-minority provisions. So, it has proposed to compel a reference to the Foreign Investment Promotion Board (FIPB) when companies with foreign investment intend to make downstream investment in sectors with caps.

This is despite the fact that under Press Notes 2 and 4, any company is considered Indian in which ownership and control is by resident Indian citizens and more than 50 per cent of the equity interest is beneficially owned by resident Indian citizens and Indian companies (the rest can be held by foreign investors). And, such a company would be considered an Indian one while making a downstream investment, which does not have to refer to the FIPB .

Rejecting this argument, DIPP has opined that when “the government has come to the conclusion that the investing company is owned and controlled by resident Indians, this investment should be taken as domestic and there is no requirement for FIPB approval”.

The DIPP adds that the need to make reference to FIPB in case of downstream investment in sectors with caps (which would also lead to a considerable administrative burden) should not arise in such cases.

DIPP has stated that the power of an Indian company to exercise control in another Indian company is based on its power to determine the “voting pattern” in the other Indian company. Therefore the core issue is the power of one Indian company to decide the voting pattern of another Indian company. That is determined by its ability to appoint a majority in the board of directors of the company.

Once the power to appoint majority directors is available, the company would also be able to direct the affairs of the other Indian company . Such determination has to be carried out on a case to case basis of the provisions of Press Note 2. Once the government, after such consideration, has come to the conclusion that the company is controlled and owned by Indian entities its downstream investment has to be treated as domestic investment and not foreign investment.

DIPP has also accepted the concept of a composite foreign direct investment cap in various sectors, which would include FIIs, NRI ADRs, foreign currency convertible bonds and convertible preference shares, regardless of whether the investments have been made under different schedules of the FDI rules.