Confusion reigns over FDI changes

Confusion reigns over FDI changes
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First Published: Sat, Feb 14 2009. 12 30 AM IST

Stakeholder: Union commerce and industry minister Kamal Nath. Manvender Vashist / PTI
Stakeholder: Union commerce and industry minister Kamal Nath. Manvender Vashist / PTI
Updated: Mon, Feb 16 2009. 05 31 PM IST
New Delhi: The government on Friday issued guidelines that seek to clear the air on how foreign direct investment (FDI) is to be calculated. Even as they give companies room to side-step the foreign investment limits in several sectors such as telecom and insurance, the new guidelines could claim some unexpected victims.
Stakeholder: Union commerce and industry minister Kamal Nath. Manvender Vashist / PTI
They also seek more disclosures from companies and bring portfolio investments into the ambit of FDI. These guidelines follow the significant changes in FDI norms announced on Wednesday.
The change in the definition of FDI has caused considerable confusion.
And there are some hints of collateral damage. One interpretation of the new guidelines would mean that some companies such as ICICI Bank Ltd would now be considered to be owned by foreign entities; and hence its 76% holding in its insurance subsidiary will be considered a foreign stake that exceeds the existing 26% FDI limit in insurance.
“It will be onerous for several companies to comply with the new press note,” Akil Hirani, managing partner of Mumbai-based corporate law firm Majmudar and Co., said.
Arguing similarly, a lawyer who did not want to be identified, said in the context of ICICI Bank, “downstream investment calculations will have to be reworked. In all likelihood, sectoral caps may be breached”.
At the end of December, the bank’s shareholding information put up on the stock exchange websites showed that about 64% of the equity was owned by a combination of foreign institutional investors and holders of American depository receipts. The FDI sectoral cap in insurance is 26%, and in the case of ICICI Bank’s life insurance and general insurance ventures, the foreign partners are operating at the ceiling.
Also See Guidelines for calculation of total foreign investment (PDF)
Guidelines for tranfer of ownership or control of indian companies in sectors with caps from resident Indian citizens to non-resident entities (PDF)
ICICI Bank did not immediately respond to an email query by Mint. The new guidelines implicitly recognize multi-tiered FDI: Foreign investment can be carried out through a series of subsidiaries to work around the present sectoral caps. The guidelines reiterate that management as well as economic control would determine whether or not a foreign holding was to be treated as FDI.
The foreign investor could buy into a target company up to the permitted ceiling, and continue to invest through a series of subsidiaries in a multi-layered investment format. Earlier this was not permitted if the cumulative FDI was breaching the sectoral cap.
Now, if at the first leg of this investment format the FDI stakes were 49% or less, the subsequent downstream investments, too, would be considered Indian and hence not outside the sectoral cap.
The guidelines have also made it mandatory for companies to disclose to the government any shareholder agreement that may affect “ownership and control”.
Further, it has laid down that barring insurance, which is governed by the specific regulations, the new methodology for calculating foreign investment will be used in all other sectors.
asit.m@livemint.com
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First Published: Sat, Feb 14 2009. 12 30 AM IST