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News flash
Change in Foreign Direct
Investment (FDI) guidelines
I.1. Background
Background
This alert summarizes the recent proposal to change FDI guidelines in the context of (i)
calculation of total foreign investment in Indian companies and (ii) transfer of ownership
or control of Indian companies in sectors with caps from resident Indian citizens to
non resident entities.
The Government of India’s press release on 11 February 2009 (www.pib.nic.in)
indicated that the Cabinet Committee on Economic Affairs (CCEA) had approved the
adoption of the changes (mentioned above) made to FDI guidelines on 11 February
2009.
II.2. Salient
Salientfeatures
featuresofofthe
therevised
press release
policy
Calculation of the total foreign investment in Indian companies:
► In the case of direct investment in an Indian Company (IC):
► All direct investment by a Non-Resident Entity (NRE) in an IC will be treated as
foreign investment.
► In the case of indirect investment in an IC through an Indian Investing Company
(IIC):
► Where the IIC is owned and controlled by resident Indian citizens and Indian
companies, which are owned and controlled ultimately by resident Indian
citizens, the IC will not be treated as having foreign investment.
► Where the IIC does not meet the condition mentioned above or is owned and
controlled by a NRE, the IC will be treated as having foreign investment to the
level of the IIC’s investment in the IC.
► Exception: In cases where the IIC has a 100% owned subsidiary, the IC will be
treated as having foreign investment to the level of the NRE investment in the
IIC.
!@#
Transfer of ownership or control of Indian companies in
sectors with caps from resident Indian citizens to
non resident entities:
► In sectors with caps, government/FIPB approval will be
required in all cases where an Indian company is being
established with foreign investment and is owned or
controlled by a non-resident entity.
► Similarly, in sectors with caps, government/FIPB
approval will be required in all cases where the
ownership or control of an existing Indian company,
currently owned or controlled by resident Indian
citizens and Indian companies, which are owned or
controlled by resident Indian citizens, is being/will be
transferred/ passed on to a non-resident entity as the
consequence of transfer of shares to non-resident
entities through amalgamation, merger, acquisition,
etc.
Takeaway
► It is pertinent to note that the terms ”own” and
”control” have not been defined in the press release
and could have a significant bearing on the way the
guidelines are interpreted.
► Adoption of the guidelines given above will simplify,
streamline and rationalize the methodology of
calculating indirect foreign investment, which was
earlier a matter of ambiguity, and hence, immense
debate and controversy.
► These guidelines are investor-friendly and predictable
and are likely to result in substantial foreign capital
inflows, and thereby send a positive signal to the
international community.
► While the proposal has been approved by the CCEA, it
needs to be formally notified in the FDI policy. News
reports suggest that a formal press note is expected
shortly in this regard.
► We have to however wait for the formal press note, to
arrive at any definite conclusion on the revised
guidelines and how they will work.
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EYIN0902-020 Artwork by Jayanta Ghosh