Calculation of FDI in case of investment in holding or intermediate companies (i.e.) indirect invest
Calculation of FDI in case of investment in holding or intermediate companies (i.e.) indirect investments
Calculation of foreign investment is extremely simple when the foreign has invested into a company which is engaged in a specific business. However, when corporate groups are involved, a foreigner may invest in an upstream company (that has subsidiaries or investments in other companies) or a mid-level company which has other operating subsidiaries. If the subsidiaries operate in different sectors, the upstream investment must comply with sectoral regulations for each sector. The foreigner may or may not intend to take a stake in the downstream Indian entity. Regardless of the investment motive of the foreigner, it is important to understand the consequence of FDI from a regulatory perspective. The examples below will explain how to calculate foreign investment in such cases.
I will refer to the investee company as the upstream company. The other company is the downstream company.
1) When direct foreign holding is less than 50 percent: Correct, if there is no majority, the stake has no significance. Assume a vote is to be taken with respect to the affairs of the subsidiary. In that case, if the holding company is to take a stance, who will be deciding the stance? It will be the majority holder. The minority's stake of 49 percent does not trickle down to subsidiaries. The foreign investment is considered nil because the affairs of the subsidiary can be entirely controlled by the majority (Indian) party. However, that does not mean that foreigners can take minority stake in holding companies which have invested in prohibited sectors such as gambling. Most legal advisors are conservative and consider that to be a backdoor way to circumvent the law, which goes against its spirit.
2) In Case 2 Part A, the upstream (holding) company has a minority stake in the subsidiary, that is, 30 percent. The holding company itself is majority-owned by non-residents, so the entire holding is supposed to be reflected below as per the rules.
3) Case 2 Part A and Part B are different - because in Part B the upstream company holds a majority in the downstream company, whereas in Part A the upstream holds a minority in the downstream company (although foreign holding is the same). A proportionate calculation is undertaken when a) the foreigner holds a majority stake in the upstream company, and the upstream company holds a majority in the downstream company (i.e. 60 percent of 80 percent).
There is no intuitive explanation for Case 2 Part B. Note that ultimately these guidelines are for calculation purposes only, so that the investment is within the limits specified for the regulated sectors, that is, these are technical rules to determine when a sectoral cap (of say, 26 percent or 51 percent) is met. In the absence of a rule calculation would be difficult.
Assumption: For the purpose of this calculation, we are assuming that the 'control' or 'voting' rights are according to their shareholding percentage. Even a minority foreign investor can have veto powers on 'reserved' matters to protect his interest, but not for actively controlling his investment."