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Since 1st March, 1999
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Fetters off foreign investment Telecom set to see dollar deluge

New Delhi, Feb. 11: The Congress-led government today lifted restrictions on foreign investment in India by rejigging the equation for calculating the extent of foreign stake in an Indian company.

The Union cabinet decided that foreign investment routed through a domestic company — owned and controlled by resident Indians — would not be factored into the equation while calculating the total foreign stake in the ultimate entity.

The government scrapped a clause which mandated that an indirect foreign investment in Indian companies would have to be taken into account while determining whether the entity had adhered to the sectoral cap on foreign investment.

Some sectors having caps are insurance, banking, airlines, telecom and retail.

Announcing the decision taken today by thecabinet, home minister P. Chidambaram said direct investment by non-resident Indians would be considered as FDI.

Similarly, if the holding company was controlled by NRIs, this would be considered a case of indirect FDI in the target company.

Chidambaram said if the holding entity was majority-owned and controlled by Indians, the indirect stake would not be factored into the calculation to determine the FDI holding in the operating entity.

Who benefits?

The rule change means that existing foreign investors in Indian telecom companies can raise their stake through the indirect route. For instance, SingTel can acquire a larger stake in Bharti Tele-Ventures and, thus, raise its stake in Bharti Airtel. Sistema will also be able to increase its stake in Shyam Telecom.

In new telecom companies in which there is a lock-in period on the sale of equity, the rule change could mean that holding firms could flog shares to foreign investors. Datacom, Unitech, and Loop are some of the firms that received licences last year and can take advantage of the rule change.

Last year, the telecom industry attracted foreign investments worth $5.8 billion. This figure could double because of the change.

Similarly, UB could use the money raised through ADRs and GDRs or other forms of placement in its spirits or other businesses to invest in Kingfisher Airlines without fears of breaching the 49 per cent FDI cap.

“We are now no longer looking at grandfather holdings after this FDI rule change,” said commerce minister Kamal Nath.

Chidambaram said the definition of the words “owned and controlled” would be included in the revised guidelines and government permission would still be required for foreign investment in areas such as defence and air transport. Civil aviation ministry officials explained that indirect airline investment in domestic airlines still remained banned.

Ownership would mean either a simple majority control or the largest equity control would have to remain with an Indian house. Control would mean the Indian promoters would have a final say in the appointment of chairman and managing directors and have a majority voice in the board.

Another company which analysts said could be hit by the rule change was Jet Airways. It is controlled by NRI investments which, under the new rules, cannot be allowed.

However, the press note on aviation FDI allows NRI investment to be defined as Indian investment. Civil aviation ministry officials said the rule still remained valid and Jet was in a safe zone. “Besides the new rule change is with prospective effect and not retrospective effect. So, Jet is safe.”

However, despite the initial confusion, all analysts agreed that the move could spark foreign investment into the country, which is needed after FIIs started pulling out of the Indian bourses following the Wall Street meltdown.

The FDI inflow of $19.7 billion between April and November is a clear indication that the current year’s FDI target of $35 billion is far too ambitious, given the recession in the West. The government had scaled down this target to $35 billion from $40 billion last month. After maintaining robust inflows till September, the inflow in October slipped to $1.4 billion and further to $1.08 billion in November.

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