DIPP clears Bharti, Tata Tele proposals

The Department of Industrial Policy and Promotion, or DIPP, has given three clearances under press notes 2 and 4, issued in February this year, which changed the way indirect foreign equity is treated while computing the total foreign investment.

The clearances are for three proposals submitted to the Foreign Investment Promotion Board by Bharti Telemedia, which offers direct-to-home television services, Tata Teleservices, in which Japan's DoCoMo has picked up 27.3 per cent equity, and SKR BPO Services, which has made downstream investments in Sparsh BPO.

The final decision will come from Finance Minister Pranab Mukherjee, who heads FIPB, after taking into account the views of other ministries and departments represented on FIPB.

The press notes state that foreign investment routed through an Indian company owned and controlled by resident Indians will not be taken into account while calculating the total foreign direct investment, or FDI, as was the case before. An Indian-owned company is defined as one in which resident Indians or Indian companies have more than 50 per cent beneficial stake; control means the power to appoint the majority of directors.

The press notes have been a bone of contention between the DIPP and the Department of Economic Affairs, or DEA. The DEA's view is that the new norms would violate sector-specific caps. The Reserve Bank of India agrees with this view, saying that the new guidelines may encourage foreign investors to violate sector-specific limits on foreign investment.

The DEA also raised questions on implementation of press notes 2 and 4 in the case of the India Rizing Fund, a defence venture capital fund which had requested deletion of an earlier clause imposed on it that stipulated separate approvals for all downstream investments in areas of defence production under sectoral caps. The case has been deferred by FIPB.

Bharti Telemedia was given ex post facto approval by FIPB and has indirect foreign holding through Bharti Airtel (which has a 40 per cent equity in the company). Bharti Airtel, however, has a foreign holding of 21.64 per cent and, under the old rules, indirect foreign investment through investment companies had to be calculated on a pro-rata basis and such an investment would require FIPB approval.

The approval was subject to compounding by RBI for not having obtained prior approval of FIPB. In a fresh proposal to FIPB, Bharti Airtel said it was controlled by a resident Indian and therefore the compounding condition should be deleted. DIPP has supported this.

Similarly, NTT Docomo was granted approval to acquire 27.3 per cent in Tata Teleservices, or TTSL, which already had foreign investment of 9.58 per cent and had made downstream investments in Virgin Mobile India, Tata Internet Services, and Tata Teleservices Maharashtra, which were done without FIPB approvals. As a result, TTSL was given FIPB approval for investment from DoCoMo subject to compounding.

The applicant has now stated that the existing the foreign investment in the company was made by foreign institutional investors and has requested deletion of the compounding clause under press notes 2 and 4.

In the third case, SKR BPO Services was granted ex post facto approval in January this year to make downstream investments in Sparsh BPO Services. The approval was subject to compounding by RBI. Under a new application, the company has asked for deletion of the compounding clause.