Here is the new Foreign Direct Investment regime that will rewrite the rules for FDI at least in sensitive sectors like telecom, media, aviation, banking defence, and insurance. The Cabinet Committee on Economic Affairs (CCEA) on Wednesday approved new guidelines for computation of foeign equity in Indian companies.
The crux of the new guidelines is that the management and economic control would be the defining criterion for determining whether or not a foreign holding in a company was to be treated as FDI. In other words, any notion of indirect or proportionate foreign holding has been done away with.
So if an investing company is majority Indian-owned/controlled, then the foreign holding in that company will not be counted as FDI when it makes an investment in another company. Such investments will be counted as purely Indian.
Such a move will pave the way for foreign investment beyond the existing ceiling in sectors such as telecom, insurance, media, defence, retail and so on.
What Will Be Considered As FDI
The ownership and control will be the chief determinant for FDI now. So investments by any company which has a majority foreign stake will be considered entirely as FDI. Take the example of Hindustan Unilever — in which Unilever Plc has more than 50% stake. If this company is to invest in any other firm, its entire investment would be treated as FDI.
While, currently, Under the existing norms, the portion of its investments which is treated as FDI is equal to the foreign stake in Hindustan Unilever. So FDI is not proportionate to the percentage of holding by the foreign company, but is determined on the basis of who is controlling or majority owning the entity.
Take the case of Bharti Airtel and Vodafone where there are now indirect foreign investments. They were earlier treated as FDI, but according to the current norms, they will not be treated as FDI.
In the case of Bharti Airtel, SingTel currently owns 31% through direct and indirect stakes. SingTel owns 15.8% in Bharti Airtel directly while 15.2% indirectly via its one-third stake in the private held Bharti Telecom Ltd (BTL), which in turn owns 45.3% in Bharti Airtel. According to the new norms, SingTel’s stake in BTL will not be considered as FDI since the company is owned and controlled by resident Indian citizens.
Similarly, Vodafone also owns a 5% stake in Bharti Airtel indirectrly through a majority Indian owned company. This will also not be treated as FDI now. According to experts, the new norms will allow Bharti Airtel to bring in an additional 20% portfolio investment or direct FDI into the company.
Similarly, Vodafone holds 52% in Vodafone Essar, and of this 10% is held indirectly through majority Indian owned companies. So only 42% of Vodafone is considered as FDI, which gives room for Vodafone Eesar to bring in an additional 10% FDI.