IN A move that comes as a relief for companies in which public sector banks or financial institutions hold stake, the government is planning to exempt investment by PSU banks and FIs with foreign equity holding from calculation of indirect foreign equity holding in an Indian company. State Bank of India, Punjab National Bank, Bank of Baroda, Andhra Bank, IDBI Bank and IFCI are among banks and institutions with FII holding.
The move would keep the route clear for foreign investment in public sector banks and financial institutions. Moreover, Indian companies in which these entities hold stake would have leeway to sell more stake to overseas entities or attract more foreign investment in joint ventures formed by them. Considering that public sector banks and FIs hold significant stake in hundreds of listed companies, officials feel the move would have significant implications for overall foreign investment flow.
Details of the methodology for calculation of indirect foreign holding in Indian companies has been finalised by the commerce department and a policy on this issue is being referred to the Cabinet Committee on Economic Affairs (CCEA). Commerce & industry minister Kamal Nath has proposed that indirect foreign equity holding would be considered beyond the first level of ownership if the stakeholders in subsequent layers are subsidiary companies. If foreign equity is more than 50% or if the subsidiary qualifies to be a subsidiary under the Companies Act, this rule will apply.
The commerce department has proposed that the policy should be finalised after inter-ministerial consultations. “Investment by public sector banks and FIs in the subject company wouldn’t be considered for calculation of indirect foreign equity,” officials said.
Indian companies with less than 10% equity in the Indian company (whose foreign holding is under calculation) would not be taken up for indirect foreign equity consideration. The department of industrial policy and promotion (DIPP) has fixed 10% as the cut-off limit since Companies Act does not confer ownership rights if the holding is less than 10%.
After the debate over indirect foreign equity holding and beneficial ownership in Hutch-Essar, the government has been working on ways to fix indirect equity holding. The DIPP’s proposals would have significant ramifications since the government plans to track indirect equity holding for all sectors, rather than just sensitive areas as was the case in the past.
If there are Indian companies who individually have less than 10%, but have declared that they are acting in concert and together hold more than 10% in the subject company (whose foreign holding is under calculation), the indirect foreign investment would be considered for each of these companies