Private equity funds are hopeful that the government will soon clear the air on the recently tightened FDI policy for countries including China, with which India shares a land border. They are now pitching for a separate dispensation for “pooled vehicles” under this policy, which had, in April this year, put investments from most neighbouring countries under the approval route.

Pooled investment vehicles are basically large investment funds built by aggregating relatively small investments from many individual investors. They are owned jointly by many investors whose money has been pooled together.

The FDI policy was tweaked in a bid to “curb opportunistic takeovers/acquisitions of Indian companies due to the Covid-19 pandemic”.

Where the control is over 25 per cent from investors domiciled in such neighbouring countries, pooled vehicles should be allowed to invest on an automatic basis in up to 15 per cent of the equity holding in private companies in India. For public companies as investee companies, there can be a regime where there could be a lower threshold or even approval for every company, according to the Indian Private Equity and Venture Capital Association (IVCA).

Private equity funds are pitching for clarity in the FDI policy as, in its absence, there is a view that prior government approval would be needed for even $1 in investment from such pooled investment vehicles investing in India.

Automatic route

The IVCA wants the FDI policy to be so worded that for “pooled vehicles” where not more than 25 per cent is controlled out of such neighbouring countries, all PE investments are allowed under the ‘automatic route’.

Kartik Reddy, co-founder and Managing Partner, Blume Ventures, and Vice Chairperson, IVCA, told BusinessLine : “Given the nature of the business and the pooled nature of the investments, the de facto ownership rests with the investment manager and he/she has unfettered rights to make the investment and exit decisions. The pooled investors are given rights through negotiated documents where you need more than a 25 per cent stake to be able to have a say in the actions of the manager. In effect, any change of documents also can be made only with super-majority rights of the pooled vehicle investors.”

Call for 10% limit

Atul Pandey, Partner, Khaitan & Co, a law firm, said: “It is necessary that government clarify the beneficial owner limit for FDI policy purpose. This would help many private equity funds and other investors who are looking to invest into India. A 10 per cent limit on the lines prescribed under the Companies Act would be more useful in the current situation.”

Aseem Chawla, Managing Partner, ASC Legal, said: “With multiple economic and fiscal laws suggesting varying definitions of beneficial ownership, it may become tedious on achieving harmonisation of the concept of beneficial ownership. The lawmakers should review the same, especially when there is Significant beneficial ownership compliance suggested in the corporate laws framework also.

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