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Finance ministry has no plan to alter FDI guidelines

August 28, 2009 03:19 IST

In a sharp divergence from its earlier opposition to Press Notes 2 and 4 that relaxed foreign direct investment (FDI) in February 2009, the finance ministry says it is not planning to recommend further changes to the guidelines.

"There is no plan to make any changes in Press Note 2 and 4 at all," a senior finance ministry official confirmed to Business Standard.  The statement comes a few months after the department of economic affairs (DEA) in the finance ministry had raised objections to the new guidelines, saying they rendered sectoral FDI limits meaningless.

North Block's decision not to alter the Press Notes eases the way for the complex $23 billion share swap deal between Bharti, India's largest telecom company, and South Africa's MTN, one of the first major test cases of the new policy guidelines.

Talks have already been extended twice -- the latest till September 30 -- to create the world's' third largest telecom company, with 200 million subscribers and over $20 billion in revenues.

Doubts about the merger had been raised owing to the finance ministry and the Reserve Bank of India's objections to the new press notes that allowed companies to skirt sectoral limits on FDI.

Asked about the Bharti-MTN deal in light of the new rules, the official said: "There won't be any problem as far as we can see." 

Press Notes 2 and 4 state that FDI routed through an Indian company owned and controlled by resident Indians will not be taken into account while calculating sectoral limits.

An Indian-owned company is defined as one in which resident Indians or Indian companies have more than a 50 per cent beneficial stake. Control has been defined as the power to appoint the majority of directors.

Some months ago, the DEA raised questions over an application before the Foreign Investment Promotion Board (FIPB) by India Rizing Fund, the country's first defence venture capital fund, promoted by some former bankers. DEA objected to India Rizing, requesting the FIPB to delete a clause stipulating approval for all downstream investments in those areas of defence production that are subject to FDI limits by using the new rules under Press Notes 2 and 4.

The Reserve Bank of India had also opposed the new press notes, arguing they could encourage investors to set up companies in which non-resident entities hold 49 per cent. In this event, downstream investments by such companies might cause them to breach sectoral FDI limits or direct investments into companies in which FDI was prohibited.

In telecom, for instance, the sectoral cap is pegged at 74 per cent and under the older norms the deal would have not passed muster, as it would have breached the sectoral limit. This was one reason the deal between Bharti and MTN did not fructify last year when talks were first held.

Under the deal, Sunil Mittal's Bharti is to acquire a 49 per cent "economic interest" in MTN. In return, MTN will acquire 25 per cent "economic interest" for $2.9 billion and MTN shareholders will acquire another 11 per cent in Bharti Airtel.

In all, MTN and its shareholders will acquire 36 per cent in Bharti Airtel in the form of global depository receipts (GDRs) that will be listed on the Johannesburg stock exchange.

The deal faces hurdles from minority shareholders who have complained to the Securities Appellate Tribunal (SAT) seeking greater clarity on an order from the Securities and Exchange Board of India which exempts MTN from making an open offer for Bharti shares as long as it does not convert the GDRs into equity. The case is up for hearing on Friday.

Surajeet Das Gupta in New Delhi
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