In a major initiative, the government plans to integrate foreign direct investment (FDI) regulations, to bring them on a par with those of mature economies. The new, principles-based regulations will phase out the present regime of arbitrary FDI caps in all sectors.
More, the new regime will do away with the additional conditions that have been inserted for several sectors in the FDI policy, which often force companies to circumvent them.
In the new regime, the focus will be on who wields management control in each sector. This means rules will be framed to ensure that the management rights of each group of investors, foreign or Indian, are made transparent.
Experts acknowledge that this is a difficult call. Accordingly, the exercise has pitched several ministries, including commerce & industry ministry, finance and ministry of corporate affairs, into devising an investment regime that is simple and yet tough enough to make all investors stick to the rules. Officials involved with the exercise are hopeful that the set of clear, principles-based regulations will be in line with the Know Your Clients norms and yet make India a far more attractive investment destination. India has targeted a sum of $40 billion in this fiscal, $16 billion more than last year.
The government feels that this approach is significantly superior to the present regime of scrutinising direct and indirect investments made by domestic and foreign entities in companies. This means the new rules would require listed and unlisted companies planning to bring in foreign investment to make mandatory disclosures on the composition of their boards and also make open the voting rights that would be exercised by the foreign and local shareholders and transfer of shares, among others.
Now, the FDI policy makes a passing reference to the concept of management control for defence and telecom and for investment companies in infrastructure sectors. This concept would be extended as a generic definition of management control across sectors.
Srinivas Kotni, managing associate at law firm Corporate Lexport, said, ?The phrase ?management control? is not defined in any law. So, for determining the meaning of management control reference may be made to the definition of ?control? as provided under the Sebi (Substantial Acquisition of Shares & Takeovers) Regulations, 1997.? Neither the Sebi regulations nor the Companies Act, 1956 defines the term management control and so these may need a revisit.
The Sebi regulations of control define it as the right to appoint the majority of directors or to control the management or policy decisions. Internationally, management control is defined from the taxation perspective, where a residential status of a company is defined on the basis of economic criteria or on its presence in a country, for it to be taxed in that country.
?There are judicial precedents in India on management and control in the context of income tax. According to these, management control resides with the board of directors and not just CEO or CFO,? said Ajit Krishnan of Ernst & Young.
