Bill on foreign cos indirect shareholdings on cards

Written by Sunny Verma | Arun S | New Delhi, Sep 27 | Updated: Sep 28 2007, 04:49am hrs
In order to promote foreign direct investment (FDI) and to simplify the way FDI is calculated, the government is preparing a Bill on indirect shareholdings of foreign investors in Indian companies.

Expected to be a comprehensive legislation, the Bill will incorporate specific provisions on indirect shareholding culled out from Foreign Exchange Management Act (FEMA), Companies Act and foreign direct investment (FDI) policy including various Press Notes and relevant laws in foreign countries.

This could end the messy tangles in Foreign Investment Promotion Board (FIPB) meetings, where applications to change non-resident shareholdings, often travel back and forth between ministries several times.

The government is studying whether all the provisions on indirect shareholding under different laws will stand the test of time in various situations, permutations and combinations of such shareholdings, if these provisions are made part of the new Bill. "It is sure that we cannot suo motu issue clarifications on the issue. There will be a separate Bill," an official privy to the development said.

As per a preliminary draft worked out by the government, the Bill would redefine ownership and holding terms linking it to effective control and beneficial interest. The plan is to count any foreign holding of over 26% in an Indian company as beneficial ownership instead of the present 49%.

These norms are being substantially rewritten after the issue of calculating indirect shareholding gained momentum, especially during recent FIPB discussions on proposals of Vodafone and Global Broadcasting Network. FIPB in its meeting in March had deffered stake sale by Hutchison-Essar to Vodafone to examine whether the multi-layered shareholding structure in the former company was breaching the 74% FDI ceiling in the telecom sector. The proposal was subsequently cleared by the Board after obtaining a opinion from the the law ministry's.

The government believes the new Bill would be able to take care of such complex transactions so that companies cannot circumvent sectoral caps by taking advantage of the loopholes in the existing laws.

As per the new calculation on indirect shareholding, foreign stakes in subsidiary companies would be calculated in proportion to that in the main company. If company B is a subsidiary of company A and company C is a subsidiary of company B, the foreign holding of C would be calculated on a pro-rata basis of the shareholding in A.

The Bill will also include the aspects of licensing conditions pertaining to FDI, as in the case of sectors like information and broadcasting and telecommunications. The separate Bill has been planned after a series of discussions among various ministries including finance, commerce & industry, information & broadcasting and telecom.