The finance ministry has proposed doing 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 three distinct categories?only operating companies, operating-cum-investing companies and investment companies. The three categories of companies are subjected to different treatments when it comes to the policy on their downstream investments.
The ministry has now told the the department of industrial policy and promotion (DIPP), the author of the press note, that such finer distinctions don?t serve any purpose and what matters is who controls the Indian company: an Indian entity or a foreign entity.
While the former (Indian entity owned or controlled) category would not be subject to any oversight, except for prohibited sectors like multi-brand retail, agriculture, lottery and tobacco among others, the latter category will have to abide by all FDI-related entry route conditions and caps when it comes to their downstream investments.
The finance ministry has also proposed to redefining ?control? in this context by including quasi-equity instruments like convertible debentures with potential voting rights attached to them.
The simpler classification proposed by the finance ministry would come handy to investors, even with the extra caution with regard to use of quasi-equity instruments, official sources said.
As per extant FDI policy, a company is ?Indian? from the perspective of who controls it if it has less than 50% foreign investment and majority of the directors on its board are resident Indians. The ministry now proposes an additional criterion to reckon foreign investment by including instruments in which voting rights could be implicit.
Chawla has sought inclusion of investments in convertible instruments and potential voting rights for determining ownership and control: ?It is felt these instruments also result in control,? he argues. These instruments include FCCBs, convertible debentures, warrants and preference shares that are convertible at a later date. According to Press Note 2004, among foreign-owned or foreign-controlled Indian companies, mere operating companies would be subject to sector caps and other conditionalities specified when it comes to downstream investments. As for operating-cum-investment companies, the downstream companies will have to comply with the sector caps and other conditionalities. As for investment companies, foreign investment in them will require FIPB approval regardless of the extent or amount of investment, in addition to complying with sector caps.