The Cabinet Committee on Economic Affairs today (11-2-2009) approved the adoption of Guidelines for (i) calculation of total foreign investment i.e. direct and indirect foreign investment in Indian companies and (ii) transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities.

The salient features of Guidelines for calculation of total foreign investment i.e. direct and indirect foreign investment in Indian companies are:

• All investment directly by a non-resident entity into the Indian company would be counted towards foreign investment.

• The foreign investment through the investing Indian company would not be considered for calculation of the indirect foreign investment in case of Indian companies which are 'owned and controlled' by resident Indian citizens and Indian companies which are 'owned and controlled' ultimately by resident Indian citizens.

• For cases where this condition is not satisfied or if the investing company is owned or controlled by 'non resident entities' the entire investment by the investing company into the subject Indian Company would be considered as indirect foreign investment.

• As an exception, the indirect foreign investment in only the 100% owned subsidiaries of operating-cum-investing/investing companies, will be limited to the foreign investment in the operating-cum-investing/investing company. For the purposes of explanation, it is clarified that this exception is being made since the downstream investment of a 100% owned subsidiary of the holding company is akin to investment made by the holding company and the downstream investment should be a mirror image of the holding company.

The guidelines on transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities would ensure that, in sectors with caps, Government approval/FIPB approval would be required in all cases where an Indian company is being established with foreign investment and is owned or controlled by a non-resident entity; or the ownership or control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares to non-resident entities through amalgamation, merger, acquisition etc.

The adoption of these guidelines will simplify, streamline and rationalize the methodology of calculation of indirect foreign investment across sectors leading to investor friendly, credible and predictable regulations. This would facilitate greater foreign capital inflows and send a positive signal in the present difficult economic scenario. The guidelines on transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities would ensure that approval of Government of India / FIPB would be required for establishment/change in ownership or control of an Indian company from resident Indian citizens to non-resident entities in sectors with sectoral caps. Indirect foreign investment rules count upstream non resident ownership as foreign and require approval when control shifts to non residents. Guidelines define total foreign investment by counting all direct non resident investments as foreign, imputing indirect foreign investment through investing companies unless those investing Indian companies are owned and controlled ultimately by resident Indian citizens; if investing companies are owned or controlled by non residents their entire downstream investment is treated as indirect foreign investment. An exception limits indirect investment in wholly owned subsidiaries to the parent's foreign investment. Changes in ownership or control that transfer an Indian company from resident Indian ownership to non resident entities in capped sectors require government/FIPB approval.