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Govt to plug loopholes in foreign investment

Jyoti Mukul  |  New Delhi 

The government plans to plug loopholes in investment of foreign equity from a single source into one company through multiple routes. Currently, different agencies monitor the foreign investment flow, leading to policy overlaps and violations.

An entity can bring in equity into an Indian company through foreign institutional investment (FII), foreign direct investment (FDI) and foreign venture capital institution (FVCI) routes. The monitoring of foreign investment assumes importance, since under the press notes 3 and 4 of 2009, investment through the three routes, besides American Depository Receipts and Global Depository Receipts, are taken into account while calculating sectoral caps on foreign investment.

A senior finance ministry official told Business Standard a working group on foreign investment is looking into various options to plug the gaps. “One of the options is to have a database through exchange of information among various organisations,” the official said. He added that the working group was planning a fresh foreign investment regime, which could lead to amendment of various regulations.

While FII investment is governed by a portfolio investment scheme under the Foreign Exchange Management Act (FEMA), FDI is monitored by the Reserve Bank of India and the Union government’s Department of Industrial Policy and Promotion.

Gaurav Karnik, associate director, Ernst & Young, said the only way to proper monitoring is by having a single agency to look after foreign investment.

The finance ministry official said single entities invest through different routes to avoid triggering of Sebi’s takeover clause.

The FII route could be adopted because of sectoral caps on foreign investment, though some experts do not agree with this view. “This is not normally done, since companies prefer to invest directly in order to have control. FII investment should be kept out of the FDI definition,” said Harry Chawla, partner in the legal and consultancy firm of Amarchand Mangaldas.

Under the Sebi takeover regulations, an investor who intends to acquire shares, which along with his existing shareholding would entitle him to exercise 15 per cent or more voting rights in the target company, has to make an offer to acquire at least another 20 per cent of the voting capital of that company. The regulation does not make any distinction between FII and FDI.

Yashojit Mitra, associate partner, Economic Laws Practice, said FEMA allows not more than 10 per cent holding by one FII and 24 per cent collectively. “The holding through the FII route is capped irrespective of the sector,” he added.

“FII investment is under more scrutiny than FDI. Especially in listed companies, an investor will always be wary since the ‘persons acting in concert’ definition is very strong and such kind of play (preventing triggering of takeover clause) is restricted. But in unlisted companies, people can violate the caps,” Mitra said. Companies have to make a post-investment filing with RBI within 30 days. “RBI and the enforcement directorate monitor this information, but how much is implemented is doubtful. For instance, a company can say it is in information technology space, but may actually be doing something else,” Mitra added.

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First Published: Mon, April 26 2010. 00:25 IST
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