The government is set to make key changes in FDI policy to remove certain inconsistencies and complexities that force investors to turn away. It is planning to align the Companies Bill 2010 and the FDI policy as far as definition of ?control? in a company is concerned. Further, the present, four-way classification of companies in the FDI policy would be replaced with a simpler division of companies as foreign-owned and controlled (FOAC) or Indian-owned and controlled (IOAC).

The finance ministry, in a recent letter to the department of industrial policy and promotion (DIPP), said that the definition of control in Press Note 2 of 2009 could be amended after receipt of written confirmation from the ministry of corporate affairs on what the Companies Bill says in this regard. The move follows a direction from the PMO to the finance and commerce ministries to resolve their differences and a series of inter-departmental meetings and consultations with the industry.

According to sources, the department of financial services in the finance ministry, in consultation with the RBI, would formulate views on foreign investment in new banks. Sources said while banks would not be exempted from the FDI policy prescriptions for determining their foreign-owned/Indian-owned nature, there could be a ?carve-out? for certain select operations of the banks to provide level playing field between Indian and foreign entities. These select operations debt restructuring, strategic investments and other para-banking activities.

There is no specific definition of control in the Companies Bill before Parliament. But there is a term called ?controlling interest? as per which a person or an entity will wrest control in a company, if he/it is the single largest shareholder in the company.

The parliamentary standing committee on finance has recently suggested that the term ?promoter? needs to be defined in the Bill. So, the attuning of the FDI policy to the Companies Bill would require fine-tuning of the Bill to start with.

Currently, the FDI policy says an Indian company could be treated as owned by resident Indian citizens and Indian companies which are owned and controlled by resident Indian citizens if more than 50% of the equity interest in it is beneficially owned by resident Indian citizens and Indian companies which are owned and controlled ultimately by resident Indian citizens. An Indian company would be taken as controlled by resident Indian citizens and companies which are owned and controlled by resident Indian citizens and companies if the resident Indian citizens/companies which are owned and controlled by resident Indian citizens, have the power to appoint majority of its directors.

Apart from defining control, the finance ministry and the department of industrial policy and promotion have agreed to do away with the distinction under the present FDI policy between various categories of foreign-owned or -controlled Indian companies for the purpose of computing the FDI element of their downstream investments. The idea is to make matters easier for investors and policymakers, even while not diluting the spirit of the policy.

The Press Note 4 of 2009 classifies such companies (Indian companies owned or controlled by non-resident entities) into four distinct categories ?only operating companies, operating-cum-investing companies and investing companies and companies which neither operate nor invest. The four categories of companies are subjected to different treatments when it comes to the policy on their downstream investments. Now, instead of having four kinds of classifications, there would be only two kinds of companies ? FOAC and IOAC.

The move will clear the confusion surrounding treatment of downstream investment for such companies.