After finmin, MCA opposes FII stake

NEW DELHI: Resistance is growing within the government to a department of industrial policy and promotion (Dipp) proposal that seeks to allow foreign institutional investors (FIIs) to have ownership in Indian companies beyond the sectoral foreign investment ceiling. After the finance ministry, opposition to the proposal has now come from the ministry of corporate affairs (MCA) which finds the logic behind the proposal totally flawed.

The proposal is based on the premise that foreign portfolio investors are interested only in financial gains and not in management control, which is a right exercised by those making long-term foreign direct investment (FDI). The proposal was to allow FIIs to invest in companies beyond the FDI ceiling in that sector, as according to this logic, it would not amount to conceding full control to a foreign entity.

The general view in ministry of corporate affairs is that there is nothing in the law that prevents FIIs from taking part in management control in a company in which they own shares, a source said. FIIs also cannot be deprived this right in any way, he added.

The official said 75% shareholders have to agree for a large number of management decisions including the issue of shares with differential voting rights, issue of preference shares, alteration of rights of a shareholder, shifting of registered office, voluntary winding up of the company and maintaining records of shareholders outside the registered office.

Passing such special resolutions would not be possible without taking FIIs on board if they owned more than 25% in a company. FII may also veto decisions not favourable to them, such as those leading to dilution of their stake, the official said adding there is no merit in considering FIIs as passive investors.

Earlier, the proposal was shot down by the finance ministry which is of the view that allowing foreign portfolio investment in specific sectors beyond the FDI cap would defeat the very purpose of putting in such caps. The issue will now be decided by a special ministerial panel headed by external affairs minister Pranab Mukherjee.