Row over foreign equity resolved;
TV channels to fly

A move to remove anomalies in determining the extent of foreign equity in broadcast media has resulted in evolving a uniform guidelines to calculate direct and indirect foreign investment in all sectors having caps

By Asif Syed

In May this year, Asha Swarup, Secretary, Ministry of Information and Broadcasting wrote a letter to Dr. Ajay Dua, Secretary, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry drawing his attention to the anomalies in determining the extent of foreign equity in broadcast media company applying for permission to uplink a news and current affairs TV
channel.

That letter led to a process that has resulted in the Department of Industrial Policy and Promotion formulating a policy to clarify and apply uniform guidelines to calculate the indirect foreign investment and foreign direct investment (FDI) not only in broadcast media companies but possibly
in all Indian companies in which foreign direct investment has been capped.

Foreign direct investment in broadcast media has been capped at 26 per cent. However, the matter has been complicated by the issue of how to treat the foreign equity component in the Indian company that is an investor and shareholder in a television company as foreign investment is made in companies through the route of direct foreign investment but also indirectly through Indian investor companies that have prior foreign investments made in them.

While any non-resident investment in an Indian company is direct foreign investment, indirect foreign investment means the foreign equity in Indian companies investing in another Indian company. As investment in a company means ownership of equity of that company FDI has been related to management control. Hence government policy has restricted foreign investment in some sectors to limit the management control of the foreign investor.

Since calculation of indirect foreign equity is based on the concept of extant of ownership which would enable influence on the management, to reach an accurate figure, Ms. Swarup pointed out in her letter to Dr. Dua, that it has become necessary for the Ministry of Information and Broadcasting to calculate not only the direct foreign investment in the company applying for uplinking permission but also the “shareholding pattern of each and every investing Indian company in the applicant company and if there are further shareholding companies within them, the shareholding pattern thereof also needs to be obtained and so on.” She went on to mention that many of the applicant companies found it difficult to present such data and that many of them had “expressed their inability to provide such details especially when the number of shareholding companies is large and in a scenario where shares are being traded and shareholding pattern is changing on a daily basis.” Because of this situation she said that it was possible that decisions taken by the ministry may be unfair to the applicant company.

To rectify the confusing situation Swarup stressed that “there is a need to prescribe a uniform set of guidelines to arrive at the foreign equity component and the FDI component in a company keeping in view our basic concern of control over management of the company,” as for now “every ministry seems to be prescribing foreign equity limits as per their own understanding”. She said that “In the light of the above, it is required that the situation may be clarified, if needed by issuance of detailed guidelines which can be adopted by all the ministries and sectoral guidelines modified accordingly. The guidelines should also provide a time frame for the existing companies to comply with the modified interpretation.”

Which is why as late as August this year the applications of many companies including broadcasters like NDTV, Global Broadcast Network and TV18 were still pending.

Swarup’s letter to Dr. Dua was followed by a letter from Dr. D. Subbarao, Secretary, Department of Economic Affairs, Ministry of Finance which said, “ there is a need to take a closer examination on precisely what constitutes direct and indirect foreign hilding as stipulated in the policy for sectors governed by an FDI cap. We noted that during the course of the discussion that there can exist structures which technically satisfy the requirement of ownership but the economic ad beneficial interests can be separated and may lie elsewhere, using indirect control through appropriate legal arrangements amongst multi-layered, multi-location entities. Such separation of ownership and beneficial interest can offset the intention behind the sectoral caps.”

So while it is necessary to streamline the foreign equity filing requirements to ease the process for business, it is equally necessary to ensure that businesses are not able to nullify the intended objective of having sectoral caps in the first place by exploiting loopholes in the policy. In the same letter Dr. Subbarao pointed out, “This clearly emphasises the need to examine and redefine the terms of holding ownership (linking it to effective control and beneficial interest), economic control, beneficial interest and beneficial holing, taking into account the complex transactions which the corporate world is undertaking. So it is not possible for any entity to circumvent the policy and make the prescription of sectoral caps infructuous.”

In July the concerned ministries met to discuss the issues involved in calculating direct and indirect foreign holding. Issues that were discussed included:
1. 26 per cent foreign equity is allowed in news and current affairs TV channels. FDI is allowed through FIPB route, for FII a general cap is approved within the limit. However it is required to calculate total foreign equity in the company in accordance with clause 3.1.3 (of the Uplinking Guidelines) wherein pro-rata foreign equity in the investing companies has to be taken into account.
2. How is the sectoral cap monitored in the case of listed companies? Are investments through Indian companies having 100 per cent foreign investment also monitored in this way or only FIIs/NRIs which are registered only monitored.
3. In case of companies going for GDR?FDR can an overall cap be approved? In this case investors are not known, neither are they registered with SEBI or stock exchanges. Can particular identities (like hedge funds, baned identities) be prohibited from investing in FDR/GDR? What is the monitoring mechanism?
4. To calculate foreign equity on pro-rata basis the share holding pattern (SHP) of all the investing companies (and their investing companies, till individual shareholding details are reached) is needed. The unknown SHP is taken as foreign shareholding. Some companies which are listed in the stock exchange like TV 18, NDTV, Global Broadcast Network Limited etc. have represented that it is not possible to get shareholdings of investing companies who buy shares from the stock market.
5. Is it possible to fix a cap in case of companies investing through stock market (say 1 percent of paid up equity) below which details of their shareholding will not be considered?
6. How shareholding by Mutual Funds, Banks, Trusts, Financial Institutions to be treated? Do they come under clause 3.1.3? How will foreign holding in these identities be taken into consideration while calculating the pro-rata foreign holding?

While the above issues mainly concerned the Ministry of Information and Broadcasting a ‘background note on calculating direct and indirect foreign holding on pro-rata basis’ was prepared
that impacts all the other sectors that have sectoral caps on foreign equity.

The note dealt with whether economic and beneficial interests were to be taken into account while calculating direct and indirect foreign holding or only the FDI equity as had been asked by Dr. Subbarao in his letter to Dr. Dua. The other matters included the “extent to which pro-rata foreign equity in an Indian shareholding company is to e calculated i.e. the level of grandfathering to be undertaken” The note also said that the clarification of the issues should be notified as “policy clarification”.

Based on these issues raised by the Information and Broadcasting ministry and the Department of economic affairs as well as the PMO the Department of Industrial Policy and promotion (DIPP) has prepared a background note which will form the basis of the new policy.

In the note the DIPP has relied on the IMF definition of direct investment, the FDI as per Indian law and Regulations and on the Companies Act, from which the DIPP says emanates the basis for fixing foreign equity caps in different sectors.

As per the Companies Act the shareholders powers in a company have three crucial stages – at 10 per cent when they get the power to requisition an Extraordinary General Meeting, at 25 per cent and above when they get the power to veto a special resolution and at 50 percent and above when they acquire the status of a subsidiary with majority holdings and at 74 per cent when special resolutions can be passed with their majority.

Taking its lead form the above provisions the DIPP has made suggestions to craft a policy to clarify and apply uniform guidelines to calculate the indirect foreign investment and foreign direct investment (FDI). In the matter of FDI the DIPP proposal is fairly simple. It says that all in sectors where there is not a composite cap then only FDI will count towards calculating foreign equity. And in sectors where there is a composite cap then the FDI along with FII investment will count towards the cap.

In the more contentious matter of indirect foreign equity the DIPP says that the foreign equity in Indian companies with less than 10 per cent shareholding in the applicant company will not be counted for calculating indirect foreign equity. In cases where the Indian companies may have less than 10 per cent each in the applicant company but have declared that they are acting in concert and together hold more than 10 per cent in the applicant company the foreign equity holding would be considered for each company while calculating the indirect equity holding.

And for Indian companies which have more than 10 per cent shareholding in the applicant company the foreign equity holding will be considered for calculating the indirect foreign holding.
The rationale for the proposal stems from the Companies Act. According to the ‘Background note on calculating direct and indirect foreign holding’ prepared by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, “the two crucial levels at which shareholders secure specific ownership rights are at 10 per cent (when they can requisition an Extraordinary General Meeting) and at 51 per cent (when they become the majority shareholder and also acquire the status of a subsidiary of the holding company). Therefore, indirect equity need to be looked into only when the shareholder company has foreign equity of more then 10 per cent when such a company gets the right ownership in the management. For determining the extent to which the foreign holdings in such shareholding companies are to be examined, it is appropriate that the level is limited to the subsidiary of a company which is incorporated overseas.”