Cabinet to change 'Control' definition in FDI policy

NEW DELHI: The Cabinet Committee on Economic Affairs on Thursday will take up for approval a new definition of 'control' in the foreign direct investment policy that would prevent backdoor entry of foreign companies in the prohibited sectors.


The proposed definition of 'control' is in sync with that existing in the Companies Bill 2012, an official said, quoting a cabinet note circulated among various ministries.

At present, a company is said to be controlled by an Indian resident if the Indian investor holds more than 51% stake and can appoint the majority directors in the firm. The definition has been further expanded to include control over the management or policy decisions, instead of just the right to appoint majority of the shareholders.

The final cabinet note defines control as, "The right to appoint majority of the directors or to control the management or policy decisions included by virtue of their shareholding or management rights or shareholders agreements or voting agreements". The issue of control had become contentious after the government modified the foreign direct investment ( FDI) policy in 2009 through Press Notes 2 and 3.

Under the new guidelines, an Indian company will be considered a foreign entity if the major stake in the firm is held by foreign investors or is foreign controlled. Any investment by such a company will also be considered as foreign investment.

The note cleared by the department of legal affairs says, "since control is central to the calculation of indirect foreign investment under the FDI policy and since there is a more comprehensive definition in other enactments, it is felt that the same with minor simplifications may be incorporated in the FDI policy."

After the Cabinet clearance, the Reserve Bank of India is expected to issue a notification to effect the required changes to Press Notes 2 and 3 of 2009 from the date of issuance of the notice.
Earlier, finance ministry had raised concerns that the current definition would give foreign investors room to exercise significant control over the decision of the investee company via quasi-equity instruments that do not provide for appointment of directors on board.

The ministry had said that such firms can then, through these Indian companies, invest in sectors where foreign investment was not allowed or there was a sectoral limit. On Monday, the Foreign Investment and Promotion Board had cleared the Rs 2,058-crore deal between Jet Airways and Etihad after the shareholding agreement was revised to assure Indian control.

The deal had faced headwinds after market regulator Sebi raised concerns that control of Jet Airways could fall into Etihad's hands with just 24% stake.