The Hindu Business Line : Indirect foreign holding: New computing method on cards

New Delhi, Sept. 7 A rejig in the method of calculating indirect foreign holding in Indian companies attracting foreign equity cap is on the cards, with the Department of Industrial Policy and Promotion (DIPP) mooting a new methodology that could be adopted uniformly for sectors with foreign equity caps.

The issue of calculating indirect foreign equity in Indian companies attracting foreign equity cap has gained greater relevance in the recent past, especially in the context of various cases like Vodafone and Global Broadcast News, which approached FIPB in the recent months.

Indirect Equity

Currently, FDI policy for telecom and the broadcasting sectors provide for calculation of indirect foreign equity of Indian companies on a pro-rata basis, along with the direct equity by the foreign investors while determining the compliance of the sectoral equity cap.

DIPP has now mooted that if the Indian company has shareholding of less than 10 per cent in an “applicant company”, the foreign holding in the Indian company would not be considered for calculation of indirect equity in the applicant company.

However, for Indian companies having more than 10 per cent shareholding in the applicant company, the foreign holding in the Indian company will be taken into account for calculating the indirect foreign equity. Also, it is proposed that this norm would be applied in situations where the foreign holding in the Indian company exceeds 50 per cent.

For example, if an Indian company A and a foreign company B put in an application for a venture, any foreign holding in the Indian company would be taken into account only if company A intends to take up more than 10 per cent stake in the proposed venture.

Also, the foreign holding in company A should be above 50 per cent and in case it is less than that, company A’s foreign holding would be ignored.

In situations where Indian companies that individually may have less than 10 per cent but have declared that they are acting in concert and together hold more than 10 per cent in the applicant company, the foreign holding would be considered for each company while calculating the indirect foreign holding. Sources said that this methodology is at a draft policy stage and some preliminary consultations have already taken place.

However, earlier in its submissions, FIPB had pointed out to DIPP that indirect holding should also be looked into from the context of economic interest, and control.