1. BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY STUDY CIRCLE
MEETING ON 25TH FEBRUARY 2009
Group Leader: CA Paresh P. Shah
FDI – PRESS NOTE NO. 2 & PRESS NOTE NO. 3 (2009 SERIES)
1. Synopsis of Discussion
1.1 Provisions of Press Note No. 2 (2009 Series) by Government of India,
Department of Industrial Policy & Promotion
1.2 Indirect Foreign Investment – Rationale of calculating methodology
1.3 Industry specific methodology – Economic & Sovereign security
2. Substantive provisions of Press Note No. 2 (2009 Series)
2.1 Cases when Investing Indian company has less than 50% non resident holding
2.2 Cases when Investing Indian company has non resident holding between 50% and
100%
2.3 Cases when Investing Indian company has non resident holding more than 50%
and invested 100% in the capital of an operating company (Wholly Owned
Subsidiary)
3. Possibility of foreign investment in Prohibited sector under FDI policy
3.1 Possibility of holding more than the sectoral cap when sectoral cap is 49% or
lower.
4. Definition of important terms
4.1 Indian resident citizen
4.2 Largest Indian shareholder
4.3 Owned & Controlled
4.4 Other terms
5. Difficulties for existing investment / operating company
6. Transfer of ownership and management control [Press Note No. 3 (2009 Series)]

2. Substantive Provisions of Press Note No. 2 (2009 Series) in relation to calculation of
foreign investment
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Non Resident Non Resident Non Resident Non Resident
Entity Entity Entity Entity
49% 75% 75% 75%
Company A Company A Company A Company A
100% 26% 80% 100%
Company B Company B Company B Company B
Company A is investing company investing in operating company B
Foreign Investment = Direct investment + Indirect investment
Assuming there is no direct non resident investment in operating company B, foreign
investment in each of the scenario is as under
a) Scenario 1: Nil + Nil = Nil
b) Scenario 2: Nil + 26% = 26%
c) Scenario 3: Nil + 80% = 80%
d) Scenario 4: Nil + 75% = 75%
The methodology will apply at every stage where Investing Indian company is
intercepted and to all Indian Companies.
In above cases it may be interesting to note that in case where non resident entity owns
more than 50% in operating cum investing/ investing Indian company, the indirect
foreign holding may be calculated at a value greater than actual beneficial holding by non
resident entity.
Eg.: In scenario 3, indirect foreign holding is calculated at 80%, however non resident
entity can control equivalent to only 60% of the capital of Company B.

3. Applying Rule of Scenario 1 to multi brand retail sector prohibited to foreign
investor
Non Resident
Entity
49%
Company A
100%
FII - NIL
Company B
NRI - NIL
dealing in
ADR - NIL multi brand
As Multi brand company B is wholly owned subsidiary of Indian Company A which is
deemed to be owned and controlled by resident entity, indirect foreign investment in
company B is calculated as Nil
Foreign Investment = Direct Investment + Indirect Investment
= Nil + Nil (NR holding in A < 50%)
Concept of Large Resident investor (eg. Information & Broadcasting Sector and
Defense Sector)
Non Resident
Entity
49%
51% Largest Indian
Company A
Shareholder
51%
Non Resident 49%
Company B
Entity
Each of the entities forming part of large investor group shall have entered into a legally
binding agreement to act as a single unit in managing the matters of the applicant
company.

4. Companies wherein sectoral cap is 49% or lower
Non Resident
Entity
49%
Company A
51%
Non Resident 49%
Company B
Entity
In above case foreign investment is 49%, however beneficial ownership of non resident
entity is 49% plus 24.99% (49% of 51%). Therefore in turn 74% of the capital of
Company B is held by non resident.
The beneficial holding can be increased each time an Indian Investing company is
intercepted.
Non Resident Non Resident
Entity Entity
49% 49%
51%
Company A Company C
51%
Non Resident 49%
Company B
Entity
Foreign Investment as per Press Note No. 2: 49% + Nil = 49%
Beneficial shareholding = 49% + 24.99% (49% of 51%) + 12.75 (49% of 51%*51%)
= 86.74%
Important Definitions
a) For the purpose of computation of indirect Foreign investment, Foreign Investment in
Indian company shall include all types of foreign investments i.e. FDI, investment by
FIIs (holding as on March 31), NRIs, ADRs, GDRs, Foreign Currency Convertible

5. Bonds (FCCB) and convertible preference shares, convertible Currency Debentures
regardless of whether the said investments have been made under Schedule 1, 2, 3
and 6 of FEMA (Transfer or Issue of Security by Persons Resident Outside India)
Regulations.
b) The term ‘Resident Indian Citizen’ shall be interpreted in line with the definition of
‘person resident in India’ as per FEMA, 1999, read in conjunction with the Indian
Citizenship Act.
c) A ‘non resident entity’ means a ‘person resident outside India’ as defined under
FEMA 1999.
d) The term ‘Indian Company’ means a company registered or incorporated in India as
per the Indian Companies Act, 1956.
e) ‘Investing Company’ means an Indian Company making equity/preference/CCD
investment into another Indian Company.
f) Holding Company would have the same meaning as defined in Indian Companies Act
1956.
g) “Owned” by resident Indian citizens and Indian companies, which are owned and
controlled by resident Indian citizens, if more than 50% of the equity interest in it is
beneficially owned by resident Indian citizens and Indian companies, which are
owned and controlled ultimately by resident Indian citizens;
h) “Controlled” by resident Indian citizens and Indian companies, which are owned and
controlled by resident Indian citizens, if the resident Indian citizens and Indian
companies, which are owned and controlled by resident Indian citizens, have the
power to appoint a majority of its directors.
i) The term ‘largest Indian shareholder’, used in this clause, will include any or a
combination of the following:
(i) In the case of an individual shareholder,
(a) The individual shareholder,
(b) A relative of the shareholder within the meaning of
Section 6 of the Companies Act, 1956,
(c) A company/ group of companies in which the individual
shareholder/HUF to which he belongs has management
and controlling interest.
(ii) In the case of an Indian company,
(a) The Indian company
(b) A group of Indian companies under the same
management and ownership control.

6. Existing Structures of Investing cum operating companies
Non Resident Non Resident FII NR
Entity Entity
NIL
FII – 48%
Company A Company B
NRI – 10% 25% or
Investing Operating Operating Co with
ADR - 15% Indian Co 74% cap of 74%
20% 7%
Resident Resident Citizen Resident Indian
Citizen Promoter Citizen
Foreign Investment in Company A
FII + NRI + ADR/GDR = 73%
Resident Citizen = 20%
Resident Citizen Promoter = 7%
100%
Foreign Investment in Company B
Case I: Direct + 25%
Case II: Nil + 74% (Can’t accept direct investment)
Press Note No. 3 (2009 Series)
Press Note No. 3 now provides for Government approval in case of transfer of ownership
and/or control in case of such transfer of shares or management by Resident Indian
citizen to Non resident.