Straightening indirect FDI

A fallout of the controversy ridden Hutch-Vodafone deal is that the government is now preparing guidelines for defining indirect foreign holding in Indian companies. This issue had held up the deal for over two months—whether the foreign holding in the telecom company breaches the 74 per cent foreign direct investment (FDI) ceiling set by the government.

The proposal has two aspects to it. First, in cases where an Indian company (say, company A) has less than 10 per cent equity in the company (say, company B) under examination for FDI content, the foreign holding in company A will not be counted. Secondly, in cases where a clutch of Indian companies has individually less than 10 per cent in company B, and they declare that they are acting in concert, the interpretation changes. In such cases, the foreign holding in the individual companies kicks in for computing FDI in company B.

So, why has a threshold of 10 per cent been proposed? According to government officials, the International Monetary Fund’s definition of direct investment demands a minimum investment of 10 per cent. The 10 per cent level also signifies the threshold beyond which an investing company can call an extra ordinary general meeting (EGM) in company B. The latter definition is more significant since the objective of regulating FDI is to define foreign control in the Indian company. The Department of Industrial Promotion and Policy is currently undertaking a consultative process on this proposal to compute indirect foreign equity, before it seeks the Cabinet’s approval.

The debate on computing indirect foreign holding has got further twisted owing to the varying interpretations across sectors. For instance, the insurance regulator (in insurance FDI is limited to 26 per cent) only recognises the investments made by the foreign promoter of the applicant and its subsidiaries (where it holds more than 51 per cent). On the other hand, the Ministry of Information and Broadcasting has sought clarity on whether or not it should include the indirect holding regardless of the extent of investments.

The process of globalisation is now offering companies greater avenues to become tax-efficient, yet not infringe on the law of the land. For instance, no less than 14 relationships defined the complex web of ownership of four promoters, Hutchison Telecom, Analjit Singh, Asim Ghosh and IDFC in Hutchison Essar, prior to its sale to Vodafone.

Evidently, regulation begets regulation. For, had there been no restrictions on FDI in the country, the debate on extent of ownerships would not have arisen in the first place.