Foreign Direct Investment (FDI) - new norms

The red carpet remains … but the frisking gets more stringent!

The recently issued Press Notes (PN) of the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce, contain new guidelines for calculation of FDI in Indian companies and transfer of ownership/control of companies from resident Indian citizens to non-resident entities.

An Indian company would be deemed controlled by non-resident, if foreign entities have the power to appoint directors on the Board or it has a majority foreign holding in it. Downstream investments by such an entity would also be deemed foreign. The only exception will be where a JV company creates a wholly-owned subsidiary in India. The foreign holding in the downstream company will be treated as equal to the level of FDI in the parent company.

According to PN-2 of 2009, a company will be considered as Indian-controlled if the foreign holding is less than 50% and foreigners have no other ‘beneficial interest’ therein.

PN 3 of 2009 has laid down guidelines for transfer of ownership and control, making it mandatory for Indian company to seek nod from Foreign Investment Promotion Board (FIPB), if it intends to transfer ownership or control to a foreign company in restricted sectors (telecom, defence production, air transport services and broadcasting). It also states that FII holdings, ADRs/GDRs, NRI investments and foreign investment through Foreign Currency Convertible Bonds (FCCBs) would now be included while calculating FDI levels of Indian companies. Their inclusion in FDI calculation never happened earlier.

PN-4 of 2009 was issued to clarify guidelines on downstream investment by Indian companies owned or controlled by non-resident entities. Such companies would have to comply with the relevant sectoral conditions on entry route and would also require prior approval from Government/FIPB where the investment is in investing companies.

Recognising the difficulty in immediate switch-over to new guidelines, the government plans to provide a six-month amnesty for Indian companies with foreign investment to comply with the new FDI rules. After the deadline however holding patterns of companies would come under strict scrutiny towards total compliance with the new rules.

On the first look, these PNs seem relevant for sectors which have sectoral caps/limits in Foreign Investment and not to sectors in which 100% Foreign Investment is permitted.