Panel to look into FDI, FII treatment to chalk out definition of control

To compute foreign direct investment (FDI) component in a company, the FDI policy may be made in sync with the definition of ?control? provided in the Companies Bill, cleared by the Lok Sabha recently and set to be considered by the Rajya Sabha. A review of the FDI policy and FDI-FII distinction undertaken by a high-level panel is likely to lead to easing of restrictions on FDI and FII in some sectors and removal of FDI ceiling in sectors like telecom.

Additionally, the committee may give a fresh look to the issues of FDI in pharmaceutical sector where brownfield investments are currently allowed at 100% and subject to scrutiny by the Foreign Investment Promotion Board (FIPB).

Sources said a working group has been constituted by the panel, headed by department of economic affairs secretary Arvind Mayaram, to draft a discussion paper on the issues regarding FDI and FII treatment including the definition of control and legal sanctity in some aspects. The group will prepare the paper in a month.

Currently, FDI of 100% is allowed in most sectors, and there are ceilings on sectors like telecom, banking, insurance, retail and defence.

In most of the sectors where FDI is allowed, the quantum of FII allowed is not specified, leading to interpretations over if and how far FII is allowed in the sector concerned. Separate FII limits are prescribed in case of hardware services under information & broadcasting and print media.

The government is keen on promoting foreign investments to bridge the high current account deficit, which soared to a historic level of 6.7% in the quarter ended December 2012.

A senior official said currently FII and FDI policies lack clarity on various accounts including issues of control which has implications for downstream investments by companies with FDI component. The RBI is not satisfied with the current definition of control in the company and there is a view that the definition of control in the Companies Bill may be adopted for regulatory purposes also.

According to the Bill, control ?includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner?. The issue has remained a bone of contention since 2009.

Currently, Indian-owned and controlled companies can make downstream investments in sectors with FDI caps without seeking approval from FIPB. But a company with 50% foreign ownership and controlled by foreigners is considered a foreign company and there have been proven instances of under-reporting of foreign holding in the companies to escape the regulation.

Finance minister P Chidambaram constituted an eight-member committee to look at the definition of the two instruments. In the Budget, the finance minister had said where an investor has a stake of 10% or less in a company, it will be treated as FII and where an investor has a stake of more than 10%, it will be treated as FDI.

As per Fema rule number 20, schedule 2, the total FII holding in any Indian company shall not exceed 24% of paid-up equity capital or paid-up value of each series of convertible debentures.