The FDI Buzz..

Law has pervaded into almost every aspect of human life and the implications are increasing day by day. “Ignorance Of Law being no excuse”, it is necessary that there should be a general knowledge of law. The need of our article is to spread knowledge of CORPORATE LAW to not only professionals, but also to the common man.

This article precisely highlights the deal of Hutchison Essar and Vodafone’s Foreign Direct Investment (FDI) in Indian markets. Indian market has been the greater attraction for all investors across the globe.

What Is FDI?

It is the movement of capital across national frontiers in a manner that grants the investor, control over the acquired asset. Thus it is distinct from portfolio investment, which may cross borders, but does not offer such control. Firms, which source FDI, are known as ‘Multinational Enterprises’ (MNEs). It is Investment in one country by firms owned in another country.

FDI Cap in Telecommunication sector in India is as follows-

FDI Policy - permits FDI up to 100% from foreign/NRI investors without prior approval in most of the sectors including the services sector under the automatic route.

     Automatic Route – The automatic route means that foreign investors only need to inform the Reserve Bank of India within 30 days of bringing in their investment, and again within 30 days of issuing any shares. The negative list includes the following:

1. All proposals that require an industrial license because the activity is licensable under the Industries (Development and Regulation) Act, 1951, cases where foreign investment is more than 24% in the equity capital of units manufacturing items reserved for small scale industries, and all activity that requires an industrial license in terms of the location policy notified by Government under the Industrial Policy of 1991
2. All proposals in which the foreign collaborator has a previous venture/tie up in India.
3. All proposals relating to acquisition of shares in an existing Indian company in favor of a foreign/Non Resident Indian (NRI)/ Overseas Corporate Body (OCB) investor.
4. All proposals falling outside notified sectoral policy/ caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the Foreign Investment Promotion Board and not to avail of the automatic route.

Following is an example that shows the impact of FDI on India with the deal made by Vodafone, the world’s largest cellular service telecom industry & The Hutch group.

In the open bid for stake in Hutchison Essar Limited India (HEL), Vodafone emerged winner with HEL India value placed at 11.1 billion$, finally settled for 10.8 billion$ for 52% stakes. Vodafone had 33% stakes in Essar-Mauritius, of which 22% constitutes FDI. The 15% stake that is held by the two Indians & IDFC was said to be FDI as the same was funded by a foreign body HTIL Singapore to acquire stakes in HEL India, allegedly the total FDI funding exceeded the ceiling of 74%.

The following summarizes the share holding pattern of FDI in HTIL India :           

Thus HEL had crossed the FDI cap marked at 74% i.e. the limit set under FEMA for any FDI in India in the Telecom Sector, alleging the transaction to be **‘Benami’ under the Benami transaction (Prohibition) Act 1988. It also violated the license condition of Department of Telecommunication (DOT).

After a long process the Foreign Investment Promotion Board (FIPB) & Finance Minister P. Chidambaram cleared that the holdings (the two Indians & IDFC) of 15.00 % stake cannot be termed FDI, as a loan was sanctioned to the holders (Indians & IDFC) to acquire such stakes. Thus Vodafone got the green signal to go through the deal.

The impacts are as follows:

• Indian government is happy to have a global telecom giant in India and is happier to make Reliance Telecom invest aggressively expand the GSM footprint creating more jobs and small business opportunities for Indians.
• Reliance would face stiff competition, thus making more and ultimate increase in employment opportunities.
• HTIL’s wanted a fair price to exit and he is a happy man.

Though the deal is approved it yet remains an ambiguity that the law for indirect funding in India must be precise to effectively overcome such issues in the future.

In our opinion the stakes bought in by the two Indian Partners, were guaranteed loans by HTIL Singapore to buy their respective stakes in the company, it is alleged that HTIL has voting rights over their shares, thus taking its interest to 67%.

The intention of Vodafone is evident from the transaction so as to acquire 67% stakes in HTIL India so as to gain Voting rights in the shares held by the two partners in India & leaving the Economic interest with HTIL Singapore. In such scenario, along with Essar’s 22%, HEL India overall FDI limit goes past 74%, thereby violating the FDI norms.

There is evidence to show that the FIPB itself had, after carefully analyzing the facts, concluded that Hutchison Telecommunications International Ltd's responses were inadequate. It felt that there were BENAMI transactions and that HTIL's stake was in excess of the 74% cap on FDI in the telecom sector. It also felt that Hutchison was not forthcoming with facts to prove that it had not violated the FDI cap or indulged in BENAMI transactions.

**Definitions.  – In Benami Transaction (Prohibition) Act, unless the context otherwise requires, -
(a)"Benami transaction" means any transaction in which property is transferred to one person for a consideration paid or provided by another person:

(b)"Prescribed" means prescribed by rules made under this Act;
(c)Property means property of any kind, whether movable or immovable, tangible or   intangible, and includes any right or interest in such property.