Indian promoter-run firms gain most from new rules

Firms controlled by Indian promoters have emerged as the biggest beneficiaries of the latest foreign direct investment (FDI) guidelines.

At the same time, Indian companies with majority foreign shareholding could find it difficult to make “downstream” investments under the two Press Notes issued by the Department of Industrial Policy and Promotion (DIPP).

That’s because the new guidelines do not distinguish between different forms of capital — whether it is FDI or portfolio investment or quasi-equity investment — and treats them as FDI. Earlier, mostly FDI, and in some cases overseas portfolio investments, were classified as foreign capital.

So, a company with high non-FDI foreign capital was considered an Indian entity even though its majority equity was foreign. Now, firms like these will be considered foreign-owned.

Any downstream investments by foreign-owned Indian companies will be treated as foreign capital and follow sectoral restrictions.
   

FDI CAPS AND RESTRICTIONS

Restricted sectors: Multi-brand retail, atomic energy, lottery, gambling and betting

Up to 20%: FM Radio*

Up To 26%: Uplinking for news channels, print media, defence industries, petroleum refining.

Up to 49%: Uplinking facilities, cable network*, DTH*, domestic airlines, air transport services, investing companies in infrastructure/service sector, asset reconstruction companies (FDI only).

Up to 51%: Single-brand retailing.

Up to 74%: Private sector banks*, existing airport development, internet service providers**, satellites, atomic minerals, telecommunications**

* FDI + FII  
** up to 49% through automatic route, beyond 49% government approval needed

MANDATORY APPROVAL
Another major change is through the Press Note 3 of 2009 series, released on Tuesday, that says that government approval will be mandatory for transfer of ownership or control of companies based in India in sectors which have foreign investment limits.

The earlier policy allowed automatic approval in certain sectors with FDI limits like banking, air transport services and telecom and internet services. In most other sectors with investment restrictions, the approval of the Foreign Investment Promotion Board (FIPB) was required. Now, government approval will be needed in sectors which have foreign investment caps.

This was done after concerns were raised among many quarters of the government on transfer of ownership and control of companies in these “sensitive” sectors to foreign entities.

Ownership in this case means having more than 50 per cent shares as well as having beneficial rights, while control means the right to appoint a majority of directors.

However, sectors where 100 per cent FDI was allowed through the automatic route would not need the government’s nod even now.

These guidelines will be applicable in situations like setting up of a new company which is owned or controlled by a foreign firm, as well as transfer of ownership or control of an existing Indian company to a foreign company through transfer of shares.

The new guidelines, through Press Note 2 of 2009 series, also specify that downstream investments by Indian companies with foreign investment, but owned and controlled by Indians, will not be considered as FDI, as was done earlier.

This measure, experts say, could allow foreign investments to be routed through firms owned and controlled by Indians to sectors without worrying about the limits or restrictions applicable to them.

However, investments made directly by foreign firms will be counted as FDI and will have to conform to the related rules.