New Delhi, July 14: The CPM has renewed its pledge to support the Congress-led government for another five years, but it has upped the ante in the stand-off over the increase in foreign investment limits in telecom and insurance.

The Left has asked the government to plug loopholes that allow foreign partners to cross the current limits of 49 per cent and 26 per cent in telecom and insurance, respectively.

The CPM feels that preference shares — a special category that restricts voting rights but gives the holders priority while paying dividend — are being misused by foreign companies to get around the limits set by the government and increase their stake in companies in the two sectors.

It has prepared a note that wants the government to go beyond a mere rollback of the higher foreign direct investment announced in telecom and insurance. The Left wants the government to rule out the possibility of backdoor stake increases by multinationals in the two sectors.

Nilotpal Basu, the CPM leader in the upper House, said: “Preference shares are being used by foreign partners of Indian insurance and telecom companies here to circumvent the current caps in these two sectors.”

The note says that preference shares are being issued at deep discounts with a nominal dividend payout of 1 per cent or so attached to it.

Firms then falter in paying the nominal dividend on these quasi-equity issues for a period of two years. This enables the foreign companies which hold these preference shares to acquire voting rights under Section 87(2) of the Companies Act, it adds.

This section says that normally preference shareholders can only vote on resolutions which affect their shares. But if a company does not pay the fixed dividend due to the preference shareholders, they have the right to vote on all resolutions, implicitly giving them full powers of a regular shareholder.

“Some foreign companies and equity funds are misusing the preference share route. This completely defeats the effect of sectoral caps prescribed and the objectives of government policy,” said Basu.

He said the Left would demand an immediate clarification that reads “voting rights that accrue to preference shares will be permitted only up to the sectoral caps, if any, for foreign equity”. The government should follow this up with necessary amendments to the relevant section of the Companies Act, he added.

CPM member Rupchand Pal, who spoke during the budget debate today, iterated the party stand that it would support not only this budget but also ensure the alliance government stays the full five-year course. But he added that differences would have to be resolved.