Reserve Bank of India Clarifies FDI Classifications

July 12, 2013 Posted by India Briefing Reading Time: 3 minutes

Jul. 12 – The Reserve Bank of India (RBI) notified guidelines this month to clarify the classification of foreign investment into companies doing business in the country. The new rules implement the previously pending definitions of foreign direct investment proposed by the Department of Industrial Policy and Promotion (DIPP) in 2009.

The notification confers legal status to DIPP’s definitions of “ownership” and “control” of businesses utilizing foreign direct investment. The definitions were originally released in Press Notes 2 & 3 by DIPP, but did not receive legal status due to the Foreign Exchange Management Act, which requires RBI notification for legal implementation of all DIPP press notes.

Ownership

The guidelines define a company as “owned by resident Indian citizens” if more than 50 percent of the company’s equity is owned by Indian citizens or Indian companies owned by Indian citizens. A company will be “owned by non-residents” if more than 50 percent of the companies equity is owned by non-residents.

Control

A company will be considered “controlled” by Indian citizens if Indian citizens or companies owned by Indian citizens have enough votes to appoint a majority of directors to the company’s board. Similarly, a company will be considered under non-resident control if the non-residents are able to appoint a majority of directors to the company’s board.

The definitions for “ownership” and “control” apply to all companies incorporated in India.

Direct and Indirect Foreign Investment

The Reserve Bank of India’s guidelines also define direct and indirect foreign investment. An investment is considered a direct foreign investment if the investing entity is “owned by non-residents.” An investment will be considered indirect foreign investment if the investing entity is a company “owned by Indian citizens,” but has itself received investment from non-resident entities.

The clarifications come amidst Finance Minister Chidambaram’s visit to the United States this month to seek foreign direct investment into projects in India.

“The Finance Minister is likely to discuss the issue of investment by U.S. companies in India, especially in the infrastructure sector, various policy measures taken by the Government to boost investment in the country and tax related matters among others,” according to an official statement released by the Indian government.

The global slowdown in FDI contributed to a decrease in investment inflows to India by 29 percent in 2012. To combat this trend, the Indian government has worked to further liberalize and clarify their foreign direct investment policy.

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