New 'Control' definition in FDI to give more teeth to shareholders' pacts

New definition will be prospective

Just days after the government approved the Jet-Etihad deal, it is all set to change the definition of ‘control’ in the foreign direct investment (FDI) policy.

The new definition will seek to give more teeth to shareholders’ agreement or voting agreements, and will apply with prospective effect.

The new definition, which the cabinet committee on economic affairs (CCEA), is expected to approve tomorrow, will replace the existing definition given under the FDI policy, thereby aligning it with the Companies Bill and Sebi view.

After cabinet’s approval, the Reserve Bank of India (RBI) will notify the new definition and repeal the earlier notification.

The cabinet note under discussion defines ‘control’ 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," sources said, quoting the final cabinet note prepared by the department of policy and promotion (DIPP) and circulated to the Planning Commission, department of economic affairs, ministry of corporate affairs and department of legal affairs, among others.

Sources said the new definition will be applicable prospectively from the date of notification of the new Press Note. In the interim period, the present definition of ‘control’ as given in the FDI policy, will be valid.

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

As far as calculation of FDI is concerned, under the proposed 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.

Ministry of corporate affairs has not responded to the cabinet note despite repeated reminders. It is expected to provide its comments during the cabinet meeting.

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

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.