Indian Retailer

NEW DELHI: The government has started insisting that the power to legally direct the actions of a company should at all times be in Indian hands if the investments it makes in other companies are not to be classified as foreign investment.

The attempt to plug the loophole in the foreign direct investment (FDI) rule follows widespread criticism that the new rules will allow foreign investment in excess of the allowed limit and effectively transfer ownership and control to foreigners even in sectors restricted to them.

The Foreign Investment Promotion Board (FIPB), the apex body that clears FDI into the country, is putting this new rider to ensure that the spirit of the new liberalised FDI norms is not defeated through undeclared arrangements between the Indian and foreign partners in ventures with local companies.

The rider is at the suggestion of the Department of Industrial Policy and promotion which framed the FDI policy. The move is to stall possibilities of foreigners effectively controlling the decisions of the investing company even when on paper the reins of the company stay with Indian promoters.

The idea is to remove the chances of firms in key sectors such as retail and defence being controlled by foreigners above the levels allowed by the law. “This is an added safety measure,” says a member of FIPB. “There are lots of ways to shift control through ‘inter se’ agreements (or the understanding between the partners in a joint venture). The new rider is to ensure that control is actually in Indian hands always,” said the official, who asked not to be named.

Leading lawyers said it is possible for promoters to comply with ownership and control norms in paper, but when the corporate veil is lifted, one might find ownership somewhere else. FDI expert and managing partner of law firm KDB Associates, Sumant Batra, said the new rider makes the letter and spirit of the FDI norms more explicit. It seeks to prevent attempts to disguise the control in a company through shareholder agreements, which are not filed with the government (unlike the articles of association of a company) but are relied upon for enforcement of contracts, explained Mr Batra.

The Board is likely to suggest this condition if it allows Analjit Singh and Asim Ghosh to sell 49% in their two companies to a foreign firm, without these companies’ downstream investments in Vodafone Essar Ltd getting classified as foreign investment, said a person privy to the development.