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Our Bureau

New Delhi, Dec 25

The Department of Industrial Policy and Promotion (DIPP) has suggested a formula for calculation of indirect foreign equity, which could have major consequences for foreign holding across various sectors including sensitive ones such as telecommunication.

In a note circulated to the Group of Ministers (GoM), the DIPP has proposed that foreign equity routed through an ‘investing Indian company’ would not be considered for calculation of indirect foreign equity, if the Indian firm is “owned and controlled” by resident Indian citizen. In case, this investment company is owned and controlled by foreign entity, the entire investment made by it into an Indian company would be considered as indirect foreign equity.

While the proposals came up for discussions at the GoM meeting here earlier this week, it is learnt to have met with resistance from the Ministry of Finance.

According to DIPP’s proposal, if for instance, indirect foreign equity is being calculated for company A, which has investment through an ‘investing company’ (company B), where foreign equity is less than 50 per cent, then the latter’s investment would not be treated as indirect foreign equity.

In another case, if the investing company (company B) has foreign equity of 75 per cent and invests 26 per cent in company A, the entire 26 per cent investment by company B would be treated as indirect foreign equity in company A.

DIPP has further proposed that indirect foreign equity will not exceed the level of foreign holding in the investing company. It has, therefore, suggested that if the investing company (company B) itself has foreign equity of 75 per cent but invests 80 per cent in company A, the indirect foreign equity in company A will only be taken as 75 per cent (limited to the level of foreign equity in the investing company). The balance five per cent would be treated as domestically held equity in company A.

However, market observers point out that the method of computation of indirect foreign equity would lead to an ‘anomaly’ as it would allow investment through investment company route.

The latest DIPP proposal may hold particular relevance for telecom sector, where instances of holding by foreign companies through pyramid structure, is commonplace.

It was earlier pointed out, that a minor equity in Hutchison Essar may have been held by Indian entities who actually bought the equity through loans extended by Hutchison. This fuelled a debate on whether this should be counted towards foreign investment or not. This issue had come to light when Vodafone bought out the Hutchison stake. The Government subsequently cleared the deal, due to lack of specific guidelines on indirect foreign holding.

“If the current DIPP proposal is accepted, the foreign investment cap may get diluted further through a complex structuring of investment companies. Also the proposal comes at a time when Government is looking at stricter norms for sectors like telecom,” market watchers pointed out.

More Stories on : Foreign Direct Investment | Policy

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