The Indian government is planning to bring in stricter rules for foreign ownerships in India. As per a Reuters report, the changes would redefine direct and indirect ownership rules of Indian companies by foreign entities and make them subject to Foreign Direct Investment (FDI) regulations.
The Indian government is also reviewing the existing foreign direct investment rules. It seeks to simplify investment and rectify the loopholes. Sources quoted by Reuters claim, the discussions on the changes in rules are close to being finalised.
Making a new category
As per the report, the government is creating a new category, called Foreign Owned and Controlled Entities (FOCE) and will include Indian firms with direct foreign investment.
This new entity will be defined as an Indian company investment fund that is controlled by an entity or person based outside of India. The new entity will also include indirect foreign investments and make it subject to the Foreign Direct Investment rules of India when it comes to changes in ownership and structure of the company.
“What cannot be done directly should not be allowed indirectly either. That will now be clearly reflected in the rules,” Reuters stated, citing sources. It further added, “Even a domestic restructuring or internal transfer could trigger FDI obligations for foreign-owned firms if the rule change is implemented.”
As per the new rules, any transfer or indirect share selling in a foreign-owned company in India has to be reported to the concerned Indian authorities, Reuters reported. All the transactions of will are required to be at the fair market value. Additionally, the company will have to comply with the sectoral foreign investment cap.
Why the new rules
With the introduction of new rules, the Indian government is trying to ensure that foreign investors cannot bypass the FDI policy of the country, sources said to Reuters.
The creation of FOCE will make it difficult for Chinese companies to enter the regulated sectors of India through backdoors like layered Indian companies and offshore investment funds.