Press Note 2 of 2009: A Fine Print

Simply put, Press Note 2(2009 series) dt. 13th February 2009, lays down guidelines for calculation of total foreign investment that is direct and indirect foreign investment in Indian Companies.

According to the Note, Foreign Investment in Indian companies includes all kinds of Foreign Investments that is FDI, FIIs, NRI, ADRs, GDRs, FCCB and convertible preference shares, convertible currency debentures regardless of whether the investment has been made under schedule 1,2,3 and 6 of FEMA(Transfer or Issue of Security by Persons Resident Outside India) Regulations.
An Investing Company is defined as an Indian company making equity/ preference/ CCD investment in another Indian Company.

While calculating Direct Foreign Investment, all investment directly by a non-resident entity into the Indian counted has to be counted as foreign investment.
The interesting provision in the PN relates to Indirect Foreign Investment. It states that foreign investment through investing Indian company would not be considered for calculation of indirect foreign investment in case of Indian companies, which are owned and controlled by resident Indian citizens &/or controlled by resident Indian citizens.

What is an Indian Company?

According to 5.2-1 of the Press Note, owned by resident Indian citizens & Indian companies means companies which are owned and controlled by Resident Indian citizens, if more than 50% of the equity interest in it is beneficially owned by resident Indian citizens and Indian companies, which are owned and controlled ultimately by resident Indian citizens.
Thus, 50%+ ownership and control makes it owned and controlled by resident Indians. Examples galore. In the Telecom Sector, which we will discuss later, Sunil Mittal promoted Bharti Telecom with 64% Indian stake and control in the hands of Mittal clan is an Indian company.
Controlled by resident Indian citizens and Indian companies, which are owned & controlled by resident Indian citizens, means if the resident Indian citizens have the power to appoint majority of its Directors.

The PN stipulates that if this afore discussed condition in 5.2-1 is not satisfied, then the entire investment by the investing company into the subsidiary Indian company, would be treated as Foreign Investment. The is a proviso to this. The exception would be a case wherein the indirect foreign investment in only 100% owned subsidiaries of operating-cum-investing/ investing companies, will be limited to foreign investment in the operating-cum-investing/ investing company. The clarification to the Note states that the exception is made since downstream investment of a 100% owned subsidiary of the holding company is akin to investment made by Holding Co. & the downstream investment should be a mirror image of the Holding Company.

As to when an Indian company is deemed to be owned by non-resident entities, it shall hold true when greater then 50% of equity interest in it is beneficially owned by non-residents. & it shall be controlled by non-resident entities if the non-residents have the power to appoint the majority of its Directors.

Illustration to the PN further clarify the situation:
If entity A is investing through entity B: If the entity B has a 49% foreign investment from entity A and then B invests in entity C, then such an investment in C through B, shall not be treated as indirect foreign investment by Entity A through entity B.





Singapore Telecom’s Investment in Bharti Airtel: Singapore Telecom has invested over 15.58% directly in Bharti Airtel and another 14.4% via Sunil Mittal promoted Bharti Telecom. Singapore Telcom has a 32% investment in Bharti Telecom, which in turn has a 45% ownership in Bharti Aitrtel. Thus, 32% of 45% works out to be 14.4% investment in Bharti Airtel by Singapore Telecom via Bharti Telecom. As for the 15.58% investment, it was treated as FDI both prior to and after the Press Note 2(2009 series) dt. 13th February 2009. However, the treatment of 14.4% works out differently, as we will see below. A backdrop of the Bharti-MTN deal in this contxt would be relevant. Prior to the Press Note 2(2009 series) dt. 13th February 2009, the M&A was not possible since it would have breached the FDI norms. There is as is well known, a 74% cap in the telecom sector.

Calculation of Singapore Telecom’s stake before Press Note 2(2009 series) dt. 13th February 2009: The investment of both 15.58% and 14.4% via Sunil Mittal promoted Bharti telecom totaling 29.98% would be the total FDI by Singapore Telecom in Bharti Airtel.
This is because, Prior to Press Note 2(2009 series) dt. 13th February 2009, the position was as follows. An investment by a non-resident, was to be treated as a direct foreign investment.
An investment by resident Indian, can be a resident or non-resident investment.
An Indian investing company having foreign investment in it was to be treated as Indirect Foreign Investment. It could be a cascading investment that is through multi-layered structure. As for the method of calculation, it could be either through the Proportionate Method as used in the Telecom and Broadcasting Sectors; or as in case of Insurance as per the rules outlined in the IRDA Regulation and for all other Sectors, the rule was that for investment in an investing company would not be set-off against the sectoral cap where foreign equity in investing company does not exceed 49% and Management of investing company is with Indian owners. It specifically laid down for FIPB approval by Investing Companies for Downstream Investment.


Calculation of Singapore Telecom’s stake after Press Note 2(2009 series) dt. 13th February 2009: As discussed in the foregoing discussions, indirect stakes via an Indian owned & controlled company would not be treated as FDI. Thus, while post PN2(2009 series), though 15.58% direct investment would be FDI; however, the 14.4% via Sunil Mittal promoted Bharti, an Indian company shall not be treated as an FDI. Thus, FDI by Singapore Telecom would only be 15.58% and not 29.98%, as calculated earlier.

Due to this change in Government Policy in indirect holdings, similar investments are anticipated to flow in the Aviation, Telecom, Retail, Insurance and Media. Thus, Press Note 2(2009 series) dt. 13th February 2009, redefines all written rules relating to FDI and makes it easier to overwhelm the sectoral caps.