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Ministries agree to let Cos Bill ?control? foreign investment regulation

In a significant move, the finance and commerce ministries have decided to accept the definition of ‘control’ as in the Companies Bill cleared by the Lok Sabha for the purpose of regulation of foreign investment as well.

In a significant move, the finance and commerce ministries have decided to accept the definition of ‘control’ as in the Companies Bill cleared by the Lok Sabha for the purpose of regulation of foreign investment as well. The new definition would take effect only prospectively and plug certain loopholes identified in the relevant press notes.

The move would have implications for corporate M&As like the recent Jet- Etihad deal, which are yet to get government approval. The nodal department on FDI, department of Industrial Policy and Promotion, will seek a Cabinet approval on the proposed change, an official source said, after a crucial meeting held on Thursday between finance minister P Chidambaram and commerce minister Anand Sharma.

The Company Bill defines control as ?the right to appoint majority of the directors or to control the management or guidelines 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?.

Since the definition in Companies Bill lays emphasis on ?indirect control? of a company, it is expected to broader in nature and more difficult to be circumvented . Devraj Singh, executive director in Ernst & Young feels, ?the new definition will streamline the control in the company in regards to the ownership and will check violation by foreign partners in a Indian controlled company as per the FDI rules?. The new definition will check influence of foreign partner in cases such as Jet-Etihad, where Jet has agreed to sell 24% stake to Abu Dhabi based Etihad through a preferential offer.

As per the new article of association, Jet has a right to nominate four directors on board while three will be appointees of Etihad. According to the share-purchase agreement, Etihad members will not only have a right to be present in all annual general meetings and other meetings but also influence appointment of independent directors. The Securities and Exchange Board of India (Sebi) has written to Jet Airways, raising questions over parts of the agreement as they appear to confer substantial management rights to Etihad. Experts feel, the agreement between the two will have to be re-drafted if it violates the definition of ‘control’ as per new companies bill once the government’s notification comes into force.

The finance ministry and RBI have long been urging the DIPP to adopt the Companies Bill definition of control to define foreign control in Indian-incorporated companies.

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First published on: 24-05-2013 at 02:35 IST