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P Chidambaram to meet Anand Sharma today to seek common ground on definition of FDI 'control'

Minister Anand Sharma has written to Chidambaram calling for a thorough examination to see if it would be a prudent to align the definition of 'control' in the FDI policy with the one in the companies bill.

NEW DELHI: Finance minister P Chidambaram's attempt to provide clarity on the conditions under which a foreign investor is said to 'control' an Indian company has run into some resistance from the commerce and industry ministry.

 

Minister Anand Sharma has written to Chidambaram calling for a thorough examination to see if it would be a prudent to align the definition of 'control' in the 

foreign direct investment (FDI) policy with the one in the companies bill, as proposed by the finance ministry. 

Chidambaram will now meet Sharma on Wednesday to thrash out the crucial issue."It needs to be seen if it would be prudent to define control as per the companies bill," Sharma is understood to have said in his letter to the finance minister.

The issue of control had become relevant after government modified the FDIpolicy in 2009 through press notes 2 and 3 to say that an Indian company that is majority foreign owned or foreign controlled will be considered a foreign company. 

Any investment by such a company would also be considered foreign investment. 

The FDI policy defined majority ownership as more than 50% stake while 'control' is described as the ability to appoint majority of directors. This gave foreign investors room to exercise significant control over the decision of the investee company via quasi-equity instruments that do not provide for appointment of directors on board. 

They could then through these Indian companies invest in sectors where foreign investment was not allowed or there was a sectoral limit. 

The companies bill, which has a more stringent definition, defines control as the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. 

The 
finance ministry feels clarity on 'control' in the FDI policy will make it easier to establish ownership in companies that have foreign investment. The issue becomes more relevant in the backdrop of Chidambaram's budget announcement about amendment in definition of FDI itself. 

The fresh reservations on the issue could delay the UPA government's initiative to have a clear cut policy framework in place to boost FDI, which fell 38% in April-February 2012-13 from a year ago to $20.9 billion. 

The two ministries had reached some understanding that Department of Industrial Policy and Promotion (DIPP) would take a proposal to the cabinet to clearly provide in FDI policy how control will be defined. 

The Reserve Bank of India (RBI) and the finance ministry have been pitching for changes in these two press notes and have had many rounds of meeting with DIPP officials to tighten the loopholes. 

The RBI on the other hand has time and again also raised the issue of these press notes leading to inadvertent opening up and wanted department of industrial policy and promotion to clarify if it was so intended. 

The DIPP itself in 2011 put out a discussion paper on the relevance of sectoral FDI caps in the backdrop of these press notes.