FDI revision on cards for voting math

NEW DELHI: The foreign direct investment (FDI) norms notified in February are likely to undergo yet another clarification, this time to take into account ownership structures that bestow control on minority stake-holders through differential voting rights (DVR). The government is likely to clarify that the downstream investments made by a joint venture in which the minority foreign investor has a decisive say through differential voting rights will be considered as indirect foreign investment.

Such a clarification is likely to have a bearing on investments in sectors where foreign investment is capped, such as telecom. Specifically, such a clarification would have a bearing on how the proposed MTN-Bharti Airtel deal would be structured.

The new way of calculating indirect foreign investment in a company notified through Press Notes 2, 3 and 4 in February requires both ownership and control in an investing company to be Indian for its downstream investments to be considered as domestic investment. In case either ownership or control vests with a foreign investor in a company, its downstream investments would be considered foreign in origin.

If the foreign partner owns more than half of the equity and the right to nominate majority of directors in the company that makes downstream investments, those investments will be regarded as foreign. However, this does not explicitly address the possibility of a foreign partner who owns less than 50% in the investing company enjoying more voting rights in it.

The company law allows issue of shares with differential voting rights. ���The section 88 of Companies Act that prohibited shares with differential voting rights was removed in 2002, paving the way for such shares,��� explained Tushar Chawla of Economic Law Practice, a leading law firm.

An official of the commerce and industry ministry, which the makes FDI policy, told ET that the new guidelines address most of the ownership and control issues through the definition of these two words. ���Besides, the Press Notes (FDI guidelines) also make it necessary for the investing company to inform the approving authority about any inter-se agreements among share-holders which have an effect on ownership and control. The authority will consider such agreements before approving the investment,��� said the official.

The government will, however, examine if investment by companies in which non-residents hold control through differential voting rights need to be explicitly defined as foreign investment, the official said. Calculation of total foreign investment is crucial as foreign ownership remains capped in sectors such as telecom.