New Delhi: The government on Friday issued a fresh set of clarifications on how it will define foreign direct investment (FDI), the third this month.
The new clarifications defined different types of companies that can be used to bring FDI into India. The attempt is to loosen controls on Indian companies, say experts.
For the first time, pure investment firms, which are used as vehicles only for FDI and have no other operations, were also defined. The definition, according to lawyers, provides a loophole for a foreign entity to use an Indian finance company as a front for its holding in another company, where the maximum possible stake it can take is limited on account of FDI rules. “The real intent is to liberalize Indian industry from the clutches of FDI norms,” said Gokul Chaudhri, partner at BMR Advisors.
Rajiv Luthra, managing partner at law firm Luthra and Luthra, felt the new amendments were a booster for Indian companies as they gave them a chance to get hold of capital without losing management control. “Absolutely a great move. Before the problem was we wanted Indian-controlled companies and there was no access to capital. Now, after Press Note 4 (Friday’s clarifications), we have access to capital and control,” he said.
Last week, the commerce ministry amended FDI policy (amendments were dubbed Press Note 2 and Press Note 3 of 2009 series). Interpretations of the amendments showed “back-door” FDI was now possible and sector ceilings could be violated. Also, new definitions meant companies such as ICICI Bank Ltd and Housing Development Finance Corp. Ltd, in which majority shareholding is with non-residents, would be classified as foreign companies even if their management is Indian.
The new FDI amendments stem from a difference between the finance and commerce ministries on how FDI should be defined. The finance ministry felt share ownership should be the primary measure, while the commerce ministry felt it was time to shift to a joint consideration of share ownership and management control .
Last week’s amendments, which received the Union cabinet’s approval, place FDI in the context of a simultaneous view of ownership and control. Consequently, guidelines have been loosened for companies in which Indian residents own majority stake and control the management of the company.
The flip side is that foreign entities can use firms that are majority-owned and controlled by Indian companies to gain indirect access to sectors such as multibrand retailing, where FDI is prohibited, as the amendments’ wording does not close this loophole.
“The liberal view is trust the Indian entrepreneur,” Choudhri said, while interpreting the spirit of the amendments. His analysis of Press Note 4 also showed an explicit prohibition was not built in. Officials in the department of industrial policy and promotion, who drafted the amendments, could not be reached for comment.
Press Note 4, for the first time, defined an “investing company” in the context of FDI. Even as the amendments and clarification loosened norms for Indian companies, they tightened the grip on investment firms. Such firms, regardless of ownership, will be cleared by the Foreign Investment Promotion Board (FIPB), which screens FDI proposals.
“Clearly, they have moved to a situation where any kind of investing company would need FIPB approval. An attempt is being made for the first time to distinguish between operating and investing companies,” Sudhir Kapadia, tax leader (technology, communications and entertainment) at audit and consulting firm Ernst and Young, said.
Malathi Nayak contributed to this story.