Foreign buying in some firms may breach FDI limits in subsidiaries — The Economic Times

Clipped from: https://economictimes.indiatimes.com

Foreign buying in some firms may breach FDI limits in subsidiaries

New rules allow full foreign ownership in listed companies unless the firm is part of the sector that has a cap on investments by overseas investors. However, companies have missed out on the deadline to bring in the cap because of the lockdown-related disruptions, resulting in new foreign ownership limits.

MUMBAI: A few listed companies are finding themselves in the mire of regulations after foreign investment limits in these firms were automatically increased to 100% of their total equity. New rules allow full foreign ownership in listed companies unless the firm is part of the sector that has a cap on investments by overseas investors. Companies were required to pass a resolution before March 31 to decide on the foreign investment limit. Lawyers said some companies have missed out on the deadline to bring in the cap because of the lockdown-related disruptions, resulting in new foreign ownership limits violating the restrictions that the government has placed on some of these sectors.

These companies have subsidiaries that operate in sectors such as inventory-based ecommerce and defence, where foreign investment restrictions apply. As per downstream investment rules, if the parent company’s FPI holding crosses 51%, its subsidiary is treated as majority foreign-owned. Subsidiaries that operate in the sectors under restricted list cannot be foreign-owned. Also, since trades by foreign investors happen on stock exchange platforms, they cannot be controlled by the companies.

“The automatic reset of FPI limit beyond 51% could impact the ownership status of the Indian entity,” said Moin Ladha, partner, Khaitan & Co. “This would create challenges from a downstream investment perspective, specifically for entities which already have subsidiaries operating in restricted sectors.”

A senior lawyer, who spoke to ET on condition of anonymity, said he is handling the cases of three corporate clients whose foreign direct investment (FDI) limits in its subsidiaries have been breached. The companies are talking to lawyers to resolve the matter, he said.

Several companies whose limit has been increased by depositories had passed resolutions in the past to keep foreign shareholding limit below 49%. For instance, Titan passed a resolution in December 2015 to limit the FPI ownership at 35%. But now the limit has been automatically increased to 100%.

In response to an email query, Titan said the increase in foreign shareholding limit is due to the new non-debt instrument (NDI) rules.

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