Govt to keep tabs on FDI in restricted areas

NEW DELHI: The new foreign investment norms, unveiled by the government through a flurry of Press Notes last month, will result in greater scrutiny of contractual relationships between foreign companies and their Indian partners, especially in restricted sectors, such as retail and telecom.

The government will watch out for attempts by foreign firms to gain entry into sectors they are not allowed to invest in through bogus partnerships, said a government official. The Foreign Investment Promotion Board (FIPB) will examine all domestic and international relationships between foreign companies and their Indian partners.

This is intended to ensure that Indian partners are not acting as proxies of the foreign firm, said the official who was involved in framing the new foreign direct investment (FDI) guidelines.

The nub of the new FDI norms, detailed in three Press Notes, is that the downstream investment of a cross-border JV is not foreign investment if more than 50% of its equity interest is ���beneficially��� owned by resident Indians, making it a company owned and controlled by Indians.

To prove that Indian investors are really in control of the JV making downstream investments, they have to show that they do not have any relationship with the foreign partner anywhere else in the world that would compromise their independence in taking important decisions.

Problems, however, may crop up with the concept of ���beneficial ownership��� of shares, as against ���legal ownership���, defined by the company law.

Examples of beneficial ownership include trusts holding the shares of a promoter or the way elders benefit from owning shares of minors.



In the case of ���legal ownership���, the owner of shares, according to the company���s shareholder register, is entitled to all the attendant rights and benefits, including voting rights.

However, as Sumant Batra, managing partner of law firm Kesar Dass B & Associates, explains, ���The revised Press Note on FDI refers to ���beneficial ownership��� as it is possible to vest real ownership of shares with someone other than the legal owner of shares by entering into innovative contractual relationships. This could mean that the legal owner may be acting on behalf of the real owner or passing on benefits from such shares to the real owner.���