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FDI net likely to be widened

Indirect foreign ownership of companies in sectors where FDI is restricted is likely to be excluded from the definition of “FDI”.

business Updated: Dec 24, 2008 20:28 IST
Manoj Gairola

Indirect foreign ownership of companies in sectors where foreign direct investment (FDI) is restricted is likely to be excluded from the definition of “FDI”. This means companies in sectors like telecom, broadcasting, civil aviation and insurance can get more than the permitted foreign equity through the indirect route.

This is envisaged in the new guidelines proposed by the ministry of commerce for calculation of direct and indirect foreign equity in sectors attracting cap on FDI. The commerce ministry had to submit the proposed guidelines to the group of ministers (GoM) in its meeting scheduled on December 23. However, the meeting was postponed.

“The foreign equity through the investing Indian company would not be considered for calculation of the indirect foreign equity in case of Indian companies which are owned and controlled by resident Indian citizens,” a note to GoM says.

“The indirect foreign equity would be limited to the foreign investment in the investing company and the indirect foreign equity in a company shall not exceed the foreign equity in the investing company.”

Commerce ministry has argued that this change would bring clarity and uniformity into the exact methodology of calculation of FDI across sectors.

Interestingly, the government had done away with this policy in telecom in 2005, saying this “loophole” was exploited by some companies to increase foreign equity beyond the permitted 49 per cent, such as the Hutch Essar incident in which Hutch managed to own over 49 per cent equity in the company.

Therefore, the government was compelled to increase the FDI ceiling from 49 per cent to 74 per cent. However, it was made clear that the 74 per cent ceiling will include both the direct and indirect foreign component in the company.

Under the new policy, Vodafone, Telekom Malaysia and Maxis increased their stake to 74 per cent. If the GoM accepts this, the 26 per cent Indian equity in telecom firms could be further diluted and foreign equity can easily go above 98 per cent.

The I&B ministry had complained that it was not possible for it to calculate FDI as guidelines were not clear.