Guest Column: Press Note 4 says, "A foreign-owned or controlled Indian company that either runs a business (operates, in government parlance) or runs a business and also invests in other companies down the line will no longer have to seek clearance from the Foreign Investment Promotion Board for making investments in yet another company."

Firstly, I think the recently introduced Press Note 2 of 2009 and Press Note 4 of 2009 issued by the DIPP constitute a very positive step taken by the Government. Both these press notes need to be read in conjunction with each other in order to understand their true implications. Having read some views in the papers on the issue, I think there are clearly some misplaced concerns about the said press notes and the impact they could have on certain “sensitive” sectors.

One needs to look at the very basis of the FDI caps in certain sectors to understand whether the said press notes permit “back-door entries” or will spawn “violations of the FDI norms”. Let us recall why India’s FDI policy contemplated FDI caps for certain sectors in the first place.

Broadly speaking, FDI caps for certain sectors were deemed necessary to address two prime concerns: (i) protection of national security interests (telecom and broadcasting are good examples), and (ii) protection of certain segments of Indian industry and/or Indian consumers (retail and real estate are good example of this). Sectoral caps were considered an effective means to address both the abovementioned types of concerns because they kept foreign ownership and control below certain levels.

The key issue concern therefore, was the extent of control that foreign parties could be permitted to exercise in Indian companies operating in certain sectors. What Press Note 2 of 2009 now has achieved is that it has removed a significant misplaced confusion that had crept into the interpretation of the rationale of FDI caps – it has now clarified that what will be the sole governing factor in reckoning FDI limits will be majority ownership and control of, and not effective economic interest in, Indian companies.


Press Note 2 makes it very clear that in the case of ‘indirect foreign holding” of an Indian company in a restricted sector (“Target”) which is held through another Indian company (“Investing Company”), the indirect foreign holding will counted as foreign holding in the Target only if: (i) the foreign ownership in the Investing Company is more than 50% of the equity capital of the Investing Company, or (ii) the right to appoint the majority of directors to the board of the Investing Company rests with foreign parties.

This is, in my view, a very logical way of looking at computation of FDI holdings, and is consistent with the objective of ensuring that management control stays with Indian parties in these sectors and that ownership by foreign parties too stays under a certain specified sectoral cap. Net economic ownership through indirect holdings ought not to be a consideration at all for reckoning FDI caps because that is not a factor that is likely to impede national security interests or social welfare interests of India as corporate control could be.

And at any rate, Press Note 2 has a built-in safeguard which provides that this clarification will not apply to sectors like insurance and broadcasting where regulations issued by the line ministries or regulators concerned adequately address computation of foreign ownership limits.


Press Note 4 of 2009 takes this clarificatory position one step further to its logical conclusion – it removes the immense difficulties faced with respect to genuine and healthy infusion of foreign growth capital to Indian companies on account of the requirements under Press Note 9 of 1999 to get prior FIPB approval whenever a foreign-owned Indian company wanted to make downstream investments.

In my experience, I have seen the infamous Press Note 9 of 1999 prove more stifling to numerous high-growth Indian companies than to foreign investors as such. Therefore, I think the repeal of Press Note 9 of 1999 by Press Note 4 of 2009 is a very welcome step which will not only facilitate more FDI but provide a lot more freedom to Indian companies to grow their businesses. Press Note 4 of 2009 however, still requires the prior approval of the FIPB to be obtained where foreign investment is to be made in a purely holding company in India.

This ensures that delays on account of FIPB approval requirement will no longer be applicable to foreign-owned “holding-cum-operating companies”, but only to purely holding companies with no other operations. The significant implication of reading Press Note 4 in conjunction with Press Note 2 therefore, is that foreign investors could invest less than 50% in an “Indian Operating-Cum-Investing Company” controlled by Indian residents and use it to make downstream investments in other Indian companies, without needing prior FIPB approval and without having the indirect foreign ownership counted for FDI caps purposes.


For the above reasons, Press Note 2 and Press 4 of 2009 will both be welcomed not just by foreign investors but by Indian industry as well. Private equity funds are certainly likely to view this move positively, as Press Note 9 of 1999 has actually proved quite a thorn in the flesh in the past with respect to the timelines for getting deals completed.” 

Vijay Sambamurthi is the founder partner of Lexygen, a Bangaore based law firm focused on private equity/venture capital, M&A and general corporate transactions.


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