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BW Businessworld

FDI: Definition of 'Control' Widened

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The government on 1 August "widened" the definition of term "control" for the purpose of mergers and acquisitions involving overseas companies, a move which will provide more clarity to foreign investors.
As per the decision, 'control' will include "the right to appoint a majority of directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreements".
"...we decided to broaden and widened the definition and aligning as far as possible with the Sebi and Companies Bill regulations. The Cabinet has considered the proposal of new definition which is not entirely identical to the Companies Bill and Sebi regulations for understandable reasons as this particular definition deals specifically with the FDI," Commerce and Industry Minister Anand Sharma said.
The revision in the definition will help in calculation of total foreign investment -- direct and indirect-- in Indian companies.
Sharma said the revised definition of the 'control' will be prospective. The decision regarding this was taken by the Cabinet Committee on Economic Affairs (CCEA).
Under the current policy, 'control' rests with one who has power to appoint majority of its directors in a company. According to sources, the justification given by the government for widening the definition is that "a foreign company could avoid this test if it did not appoint the majority of directors but otherwise exercised control over the Indian company in indirect ways such as lien over voting rights or shareholders agreements".
The revised definition of 'control' will expand the scope of the term to cover "management and policy decisions, shareholding, management rights, shareholders agreements". It will also be in line with definition provided in the Substantial Acquisition of Shares and Takeovers (SAST) Regulations, 2011 and the Companies Bill, 2012.
Not To Apply On The Jet-Etihad Deal
However, the Cabinet approval of a revised norm to define 'effective control' for the purpose of FDI will not apply on the Jet-Etihad deal as it will be applicable only with prospective effect.
"The new definition (of effective control) will be prospective, it will take a while for it to be notified and all regulations accordingly aligned thereafter, including the FEMA guidelines," Commerce and Industry Minister Anand Sharma told reporters after a meeting of the Union Cabinet.
The Foreign Investment Promotion Board (FIPB) earlier this week had allowed Jet Airways to sell 24 per cent to Etihad Airways for Rs 2,058 crore after the government ensured that the control of the carrier rests with the Indian promoter.
Finance Ministry sources said the new definition of control would not apply to the aviation deal as the FIPB, which is the nodal agency for all foreign direct investments, has already taken a holistic view.
"We have taken into account the broader point of view while deciding on the aspect of 'effective control' in the Jet-Etihad deal. We have already factored in control aspect while according clearance to it," a top finance ministry official said.
Etihad is the first carrier to pick up stake in an Indian airline firm since the Cabinet allowed foreign airlines to invest up to 49 per cent in Indian carriers.
The deal won regulatory nod after a revised shareholder agreement decreased Etihad's presence on the board of Jet, addressing concerns that Etihad appeared to be taking control of the Indian airline.