Companies planning to go in for foreign investments may need to consolidate their shareholding to develop one single largest shareholder. The government will specify a minimum percentage of shareholding, which must be achieved by the domestic largest shareholder. This has been done to put an end to foreign companies gaining complete control of Indian companies due to the often-fragmented domestic shareholding patterns.
According to government officials, the proposal will extend the concept of the ?single largest Indian shareholder,? currently employed in the news media sector, to other sectors too. In this sector, the single largest Indian shareholder needs to have 51% equity in the Indian company.
The government will start this exercise in sensitive sectors like telecom, financial services, aviation and infrastructure and later extend it. The new rule would apply to these sectors, where the foreign investment cap is less than 100%.
This means if the threshold limit is 15% for a sector and the promoters hold only 10% in their company, they would have to buy back 5% shares from other domestic shareholders, before the FDI comes in. According to the sources the threshold limit for various sectors would be notified soon.
The sources said the departments and ministries have been asked to come up with the minimum shareholding that the single largest Indian shareholder needed to have in various sectors. These may be incorporated in the various FDI rules governing various sectors.
?There have been many instances, where the Indian shareholding is so fragmented that the domestic investors have no say in the running of the company. This allows the foreign investors to gain a complete control of the Indian venture. The interest of the Indian investor has to be protected and we have seen this working very well in the case of the news broadcasting sector,? said a government official.
They said fragmented shareholding by Indian shareholders have been exploited by some foreign investors to exert management and operational control over their Indian acquisitions. For example, in a sector like telecom, where the government allows 74% FDI, Indian shareholding was split across various domestic investors, giving the foreign investor a disproportionate role in the running of the company. It has also been pointed out that the funding sources of a substantial number of smaller Indian shareholders have been traced back to the foreign investor itself.
?Many of these investments may be confirming to the rules in letter, but are circumventing them in the true sense of the rules. We are trying to plug the foreign investors gaining the complete control of Indian companies, where 100% foreign participation is not permitted,? the source said.
