FDI norms to be altered after Hutch-Essar stake tangle

New Delhi: After Hutchison Essar shareholding tangle, the finance ministry is planning to come out with a fresh set of guidelines for foreign direct investment (FDI) that will clearly define what constitutes indirect holding, beneficial interest and other forms of economic control.

The exercise is aimed at plugging loopholes and ensuring that companies follow both the letter and spirit of foreign investment rules and the new guidelines are being prepared by the Foreign Investment Promotion Board (FIPB) under the department of economic affairs (DEA).

The department of economic affairs, commerce and industry all support the need for an overhaul.

The overhaul in guidelines has been triggered by the Vodafone International Holdings B V proposal, cleared with conditions on May 7, asking the government to take note of its acquisition of 51.96 per cent in Hutchison Essar Ltd, India''s fourth-largest mobile service provider.

The key issue raised here was whether Hutchison Essar had violated the 74 per cent FDI limit for telecom services due to the financing and holding arrangements for 15 per cent equity of the company by its managing director Asim Ghosh, Max group chairman Analjit Singh and financial institutions IDFC and SSKI.

The issue that came under scrutiny was whether the beneficial interest of this 15 per cent holding had been transferred to Hutchison Essar''s former owners, Hong-Kong-based Hutchison Telecom International Ltd (HTIL), which had extended credit support to the Indian shareholders to acquire their shares.

The FIPB says the issue of indirect holdings needs to be clarified since it impacts all sectors that have FDI limits.

The FDI allowed in telecom services is 74 per cent. Another five, including broadcasting services, allow 49 per cent. Another five sectors including print and defence permit only 26 per cent. Four sectors are barred from FDI — atomic energy, the lottery business, gambling and betting and retail (except single-brand retailing where 51 per cent FDI is allowed).