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Foreign Investment dams broken to flood equity in the Indian economy

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By Dr. Sanjay Chaturvedi, LLB, PhD

The downtrodden Real Estate sector in India has another opportunity to revive itself.

The Indian economy had opened doors to foreign investment with relaxations in ECB rules through the economic packages but now it has smashed its walls as well.

The revised norms for computation and methodology of foreign holding in an Indian company were introduced by the government on the auspicious day of Friday the 13th. The new guidelines would count equity investment routed through foreign companies, in which Indians hold majority ownership and control, to be treated as domestic equity. A 51% stake is all that is required by an Indian company or the right to appoint majority of the board members to be treated as a resident entity. The other way would stand as a Foreign Direct Investment (FDI).

The move was cleared by the Cabinet Committee of Economic Affairs (CCEA). All forms of foreign investment – FDI, Foreign Institutional Investment (FII), Non-Resident Indians, American Depository Receipts, Global Depository Receipts, Foreign Currency Convertible Bonds, and Convertible Preference Shares – would be taken into account.

Beneficial Ownership

A Press Note prepared by the Department of Industrial Policy and Promotion (DIPP) made a change to bring in the concept of ‘Beneficial Ownership’ to determine whether a company can be termed domestic or not. The Companies Act does not define beneficial ownership. But it is commonly understood to mean cumulative ownership arising from direct and indirect holdings in a company. If this understanding holds, the Press Note marks an improvement, which had done away with any concept of indirect foreign ownership through an investing company that is not majority-owned by foreigners.

Nods and approvals are also necessary from the Foreign Investment Promotion Board (FIPB) for purposes of beneficial ownership and transfer of ownership.

Revisions may be required

The difficulty may arise if holdings by foreign institutional investors, as well as, by Indian-owned companies with minority foreign stakes, keep changing. Moreover, the case of Indian resident warehousing shares on behalf of a foreign investor is not addressed.

Pessimists and cynics perceive this move as clandestine as it would make the country more prone to negative external stimuli and dependence. This is believed as it would expose the country directly to the global recession.

About Dr. Sanjay Chaturvedi

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