RBI notifies rules under Fema to operationalise FDI decisions

The central bank has also widened definition of term 'control' under Act

The Reserve Bank of India (RBI) has come out with notifications under the Foreign Exchange Management Act (Fema) to operationalise foreign direct investment (FDI) policy in multi-brand retailing, telecom and others. It has also widened the definition of the term ‘control’ under the Act which would have repercussions on downstream investment by an entity controlled by foreigners.

The notification follows the Cabinet decision of August 2 to relax foreign investment norms.

The government had relaxed norms for 51 per cent multi-brand retail trading and eased the mandatory 30 per cent local sourcing norms for companies. The notification says the mandatory 30 per cent local sourcing norms for multi-brand retailers was diluted. It now permitted states to include cities with population less than 1 million for allowing multi-brand retailing.

The cap in telecom was increased to 100 per cent from 74 per cent. FDI of up to 49 per cent can come through the automatic route. Similarly, a slew of decisions were taken to raise FDI cap in credit information companies, asset reconstruction companies as well as defence production.

“The FDI policy is now notified under Fema regulations and is effective from August 22,” Department of Economic Affairs Secretary Arvind Mayaram told reporters here.

The notification would have to be tabled in Parliament within 30 days of the commencement of the next session, Mayaram said, adding it could also be put to vote in case a member decided to challenge it.

The notifictions for multi-brand retail were listed for debate in Parliament in the just-concluded session but could not be taken up.

According to the new definition, ‘control’ would include “the right to appoint a majority of directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreements.”

Under the current policy, ‘control’ rests with one who has power to appoint the majority of its directors in a company.

This would operationalise the controversial Press Notes 2,3 and 4 of 2009. These notes, incorporated later in the consolidated policy, became controversial as these said the entire downstream investment through an investing Indian company would be considered for calculation of indirect foreign investment if an Indian company is ‘owned and controlled’ by non-residents, and sectoral FDI caps would apply on those. However, there were some exceptions, especially in relation with 100 per cent subsidiaries of investing companies.

The press notes suggested the types of instruments for calculating indirect foreign investment into a firm should be foreign direct investments, those by foreign institutional investors, qualified foreign investors, non-resident Indians, those through American depository receipts or global depository receipts, foreign currency convertible bonds, compulsorily and mandatorily convertible preference shares and fully, compulsorily and mandatorily convertible debentures.

In this regard, a firm owned by non-residents would mean an Indian firm where over 50 per cent of capital is beneficially owned by foreigners.

Also, the Jet-Etihad airline deal had to change its shareholders’ agreement earlier to subject itself to this new definition of control.