a) The learned speaker at the outset observed that the Foreign Direct Investment (FDI) Policy has always been a contentious issue. Recently in an attempt to simplify the FDI policy, the Dept. of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry has issued three Press Notes being PN 2, PN 3 and PN 4 all of 2009. These notes and related issues will be the subject matter of today’s discussion. To describe in nutshell, Press Note No 2 seeks to bring in clarity, uniformity, consistency and homogeneity into the methodology of calculation of direct and indirect investment in Indian Companies engaged in varied sectors and activities. Press Note No. 3 gives guidelines for transfer of ownership and control of Indian Companies from the hands of resident Indians to non-resident entities. Press Note No. 4 lays down the policy of downstream investment by Indian Companies.
b) As a normal rule, investments of Non-Resident Individuals, Companies and other N.R. bodies in Indian Companies require approval of Govt. The issue becomes complex where the investment is made by Indian Companies in which there is already a foreign shareholding. Till recently, though the condition of getting approval from Foreign Investment Promotion Board (FIPB) was prescribed, the criteria and expected norms and preconditions to be fulfilled for getting such approval were never laid down or prescribed. Again, one has to keep in mind the various rules and norms applicable to investments, depending on category and nature of activity of Investee Co. For example foreign investment is prohibited in Defence-related sectors, whereas certain caps or ceilings on percentage of foreign holdings are applicable to other categories. There are also some automatic routes not requiring approvals. In software industry for example even 100% foreign investment is permitted. Where F.I.P.B. initiated action against companies for not taking required approvals, F.I.P.B. required the companies to get their offences compounded through RBI. In the absence of specific guidelines on the criteria to be applied, the position of so-called erring industries was unenviable and precarious.
c) After explaining the background, the Learned Speaker moved to detailed analysis of each Press Note and gave his comments thereon.
2. Press Note No. 2 of 2009
Press Note 2 has introduced a new concept of treating an Indian Company as a foreign Co., for the purpose of FDI, if it is owned and controlled by persons other than Indian citizens and Indian Cos. For deciding exact category of such investee Co., the concept of owning 50% plus one share will be the determining factor.
The concept of takeover and control regulation, where control is exercised without owning 50% plus one share is not adopted as is apparent from Press Note No. 2. What is being adopted is ability to control the composition of Board of Directors. The nationality of Directors is not relevant. So, if 50% plus one share is owned by foreign individuals and/or foreign body corporates, such Indian Co. will be deemed to be Foreign Co., for purposes of deciding the percentage of foreign investment in any Indian investee Co. For deciding the question of approval of F.I.P.B., it will also be necessary to look into issues like nature of activity, prohibited fields, sectoral caps on investments, etc. So long as investor Co. is owned and controlled by Indians, the existence of foreign shareholding in such Investing Co. can be ignored.
3. The line drawn by Press Note No. 2 is that so long as the percentage of foreign investment is less than 50%, the Co. will be treated as owned and controlled by Indians, giving it freedom to make investments in other Cos. and will be considered as investment by Indian Co. There is a general rule that the status of holding Co. whether an Indian Co. or foreign Co, decides status of its wholly-owned subsidiary. If there is a wholly-owned subsidiary of a deemed foreign holding Co. and the holding Co. in turn is owned and controlled by foreign interest, even then the subsidiary Co. will not automatically become deemed foreign Co., but the degree of foreign control will be measured by percentage of foreign stake in the holding Co. This is a departure from general rule made by Press Note No. 2.
4. Press Note No. 3 of 2009
This Note deals with issues arising from transfer of shares. Earlier the Reserve Bank Master Circular of October 2004 dealt with threshold caps, cross-border transfers and pricing of such transfers. Now, as per this Press Note, any transfers of shares from Resident to Non-Resident, if not resulting in a change in ownership and control from Indian hands to foreign hands, does not require approval of F.I.P. Board.
5. Press Note No. 4 of 2009
a) This deals with downstream investment where an Indian Co. having foreign shareholding invests in another Co. If such Co. makes investment in shares of other Indian Co., it is called downstream investment.
b) Any economic sector in which such Indian Co. is operating will be its operating field. This will include even Non-Banking Financial Cos. Investment of such operating Co. in another Co. is considered by this Press Note.
c) If the activity of a Co. is not prohibited as in case of Defence-related fields, then investment in that Co. through FDI will be permitted, subject to sectoral restrictions or ceiling on percentage holding. To illustrate, a software activity is not a prohibited activity, so any investment in such software company even by deemed foreign company is not prohibited, nor will it be violation of Exchange Control Regulations. However, where a company wants to act purely as investment company and does not participate in the activity of investee Co., then the approval of F.I.P.B. will be required.
d) In respect of Non-Banking Financial Cos. having many activities such as financing, hire-purchase, underwriting shares and rendering other services, then approval will have to be taken by NBFC.
e) Where a foreign company wants to buy and sell shares on Indian stock market, FII Registration will be necessary. There are restrictions on holdings and dealings of Foreign Institutional Investors in Indian companies; percentage caps, sectoral restrictions govern such investments. In contrast with restrictions on purchase of shares, sale of shares by Non-resident on stock exchange is permitted. After such sale, the proceeds can be repatriated without any prior permissions or approvals.
f) There is restriction on buying shares on stock exchange. Where shares are purchased for investment purposes, the approval of F.I.P.B. will be necessary. For operating-cum-holding company the real test will be whether ultimate investee company is on automatic route or whether there exist any restrictions qua activity, or percentage holding.
6. The learned Speaker thereafter ably replied various questions raised by participants. The meeting then terminated with a vote of thanks to the learned Speaker Mr. Somashekhar Sundaresan.
