The government wants to redefine the concept of beneficial ownership in Indian companies. As a part of its plans to bring in a stricter foreign direct investment (FDI) regime, the government wants to count any foreign holding of over 26% in an Indian company as beneficial ownership from the present 49%.

Holding of over 26% gives the stakeholder a board position as well as powers to block special resolutions at board meetings as well as annual general meetings (AGM). To ensure a closer monitoring of such investments and holdings, the government is likely to stipulate that such proposals would need a specific approval of the cabinet through inter ministerial consultations.

Sources also indicated that to bring this into effect the government is likely to make changes to the Press Note 2 (2000), which stipulates that only companies with foreign equity of over 49% will be treated as a company owned by the foreign entity.

In the case of indirect holding, foreign equity of over 10% in the parent company will be counted to calculate the foreign equity participation in the Indian company. This means that if a holding company has foreign equity of over 10%, it will be counted towards calculating the indirect foreign holding in a subsidiary company.

?A 10% holding gives the company powers to call for EGMs. This is the first threshold of ownership,? said a government official.

The government is also framing rules to bring transparency and clarity to indirect shareholdings to ensure that companies do not breach FDI caps. The proposed rules governing the calculation of indirect shareholding will be common to all sectors.

To be drawn up on the lines of those in developed nations called ?grandfathering clauses?, the rules aim to make more transparent the indirect stake of foreign investors in Indian companies, thereby bringing benaami shareholdings into stark relief. Under the model consideration, the foreign stake in the beneficial owner company would be calculated on a pro-rata basis.

This would mean that If company B is a subsidiary of company A and company C is a subsidiary of company B, the foreign holding C would be calculated on a pro-rata basis.

The move comes soon after the information & broadcasting ministry asked the Foreign Investment Promotion Board to defer the FDI proposal of Global Broadcasting Network because of a lack of clarity on the indirect holdings in the company.