FDI norms to hit subsidiary investments

FDI norms to hit subsidiary investments
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First Published: Wed, Feb 18 2009. 12 46 AM IST

Updated: Wed, Feb 18 2009. 12 46 AM IST
New Delhi: Changes in foreign investment norms announced last week will affect the future ability of some Indian firms that will now have to be classified as foreign ones to invest in their subsidiaries, said a government official familiar with the issue.
The changes, which mandate that foreign portfolio investment (also termed investments by FIIs or foreign institutional investors) and equity raised from overseas share sales be taken into account while calculating the extent of FDI or foreign direct investment in a company, will re-classify companies such as ICICI Bank Ltd and Housing Development Finance Corp. Ltd (HDFC), with more than 50% foreign holdings as foreign-owned.
Also See Reclassification Row (PDF)
The commerce ministry’s Department of Industrial Policy and Promotion (DIPP) has said that the new rules will not affect insurance, which is governed by a set of rules put in place by the sector’s regulator. Indian rules mandate that FDI in an insurance venture be less than 26%.
Currently, going by the new definition, the foreign holding in ICICI Bank is 65.6% and in HDFC, 73.85%. ICICI Bank and HDFC have 74% stake in their respective insurance companies, ICICI Prudential Life Insurance Co. Ltd and HDFC Standard Life Co. Ltd, respectively. To be sure, there are other companies where the foreign holdings will have to be recalculated accordingly.
The clarification by the official, a senior official at DIPP who spoke to Mint on condition of anonymity, is the latest twist in a series of confusing turns that have ensued after the government announced last week, new foreign investment norms that said that any foreign investment by a company in which an Indian firm held at least 51% equity would be considered Indian and not foreign. This allows foreign firms to take benefits of effective stakes in companies far in excess of current FDI ceilings.
The new rules also equated all forms of foreign investment, which has led to a reclassification of some Indian companies as foreign-owned.
ICICI Bank has written to the Foreign Investment Promotion Board, the apex body that clears FDI proposals, arguing that since 28% of its holdings were in American depositary receipts (ADRs), voting rights of which are vested with the ICICI board, it could not be classified as a foreign company. Talking to CNBC-TV18, ICICI Bank chief executive Chanda Kochhar also said the bank could continue to invest in its insurance arm because insurance regulator Insurance Regulatory Development Authority (Irda) sees ICICI Bank as an Indian firm.
J. Hari Narayan, chairman of Irda, said the regulator was “examining the whole issue”.
And the commerce ministry official clarified that although there were no voting rights associated with ADRs, this stake would be classified as foreign investment.
On Tuesday, it emerged that the new rules presented other points of contention as well.
Ketan Dalal, executive director at audit and consulting firm PricewaterhouseCoopers, said majority foreign-owned firms would still be subject to sectoral caps: “In relation to Indian companies where there is a majority foreign holding, but the foreign holding is widely dispersed and the control is with Indian residents, on a plain reading (of the press note), such companies seem to be subject to sectoral caps, since the sectoral cap trigger seems to be linked with either ownership or control vis-a-vis non-resident Indians.”
Analysts and experts had initially read the new rules as implying that sectoral caps could be breached, a position that many still maintain.
The commerce ministry official also clarified that any joint venture of an Indian company with a strategic foreign investor that was owned and controlled by resident Indian citizens, could enter hitherto restricted sectors such as multi-brand retail.
Teena Jain and Sanjiv Shankaran contributed to this story.
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First Published: Wed, Feb 18 2009. 12 46 AM IST