THE Cabinet Committee on Economic Affairs (CCEA) on Wednesday adopted new guidelines for computation of foreign equity holding in Indian companies. This opens up the scope for additional foreign equity inflow into Indian companies, and, in the process, dilutes the foreign investment ceiling that had earlier been imposed in sensitive sectors such as telecom, media, aviation, banking, defence and insurance.
Except in the case of 100% subsidiaries of majority foreign-owned/controlled Indian companies, where foreign investment will continue to be measured as of now, in all other companies, any notion of indirect or proportionate foreign holding has been done away with. The entirety of investment in a company by an entity that is majority owned/controlled by foreign investors would be treated as foreign investment. If the investing company is majority Indianowned/controlled, foreign holding in that company will not reflect in the investment it makes in other companies — all such investments would count as purely Indian. However, any such investments in sectors that have caps on foreign investment and result in foreign ownership will have to be vetted by the government/foreign investment promotion board.
If the final investee company is a 100% subsidiary of a company that is majority owned/controlled by a foreign company, however, the foreign investment in that 100% subsidiary would be deemed to be to the same extent as that in the company of which the investee company is a subsidiary.
The department of industrial policy and promotion (DIPP) will soon issue guidelines to describe ownership and management control. ET understands that such definition will mean either 51% ownership or the right to appoint the majority of directors.
The new norm is expected to allow companies in a sector like telecom to raise the extent of foreign investment. The new norms will benefit all such companies that have touched their foreign direct investment ceiling and part of the investment is through an Indian company owned and controlled by resident Indians.
PASSAGE TO INDIA CASE I Foreign company has ownership or control (i.e. over 51% stake or right to appoint majority of the board members) in investing company. The entire stake picked up by investing company in target company will be treated as FDI CASE II Foreign company does not have ownership or control (i.e. less than 51% stake or right to appoint majority of the board members) in investing company. The stake picked up by investing company in target company won't be treated as FDI Applicable to Bharti CASE III Foreign company has ownership or control in investing company. Latter sets up 100% subsidiary. FDI in the subsidiary, which holds telecom licence, calculated on proportionate basis — the percentage of investment made in the subsidiary multiplied by the percentage of foreign ownership in the investing company Applicable to Vodafone CASE IV Foreign company invests directly in target company. Entire investment is FDI
CUSTOMS WAIVER FOR PRINT
The government on
Wednesday waived customs duty on newsprint with immediate effect to help the print media. Customs duty has been removed on paper used for printing both magazines and newspapers.
PAGE 7 New guidelines to end disputes over ownership, control
THE government hopes to end any confusion over the issue with the new guidelines and put to rest the disputes over ownership and control, said an official press release. Home Minister P Chidambaram said: "All investments directly by a non-resident entity into an Indian company will be counted as foreign in-vestment, while foreign investment through an investing Indian company will not be considered for calculation of the indirect foreign investment, in case the Indian company is owned and controlled by resident Indian citizens."
"The guidelines for transfer of ownership from a resident Indian citizen to non-resident Indian entities are being revised too," he said. He added that for sectors with caps such as defence production, air transport services and telecom government and foreign investment promotion board (FIPB) approval will be required. For instance, if company A, in which foreign investment is less than 50%, invests in a company B, foreign direct investment (FDI) will be nil. If, the company A has foreign investment which is more than 50% and it invests 26% in Company B, then the entire 26% will be calculated as indirect foreign investment. "The objective is to make (FDI policy) simple and transparent, according to the Department of Industrial Policy and Promotion (DIPP)," Mr Chidamdaram said.
Current norms use a proportionate method to calculate indirect foreign equity. Under this method, which is followed in case of telecom companies, if company A has foreign investment of 50% and invests 26% in company B, FDI in B will be calculated at 13% (50% of 26%). Therefore, by the present guidelines, a foreign partner in an Indian JV is not allowed to exceed its investment beyond 60% (despite the FDI cap of 74%) if the domestic partner's own equity structure has FDI that indirectly works out 14 % in the JV. With new changes, the foreign partner in the JV can increase its stake (within 74% cap) as the indirect FDI holding will not be taken into account.
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