Government should clearly define "control" in the shareholding pattern of companies,so that foreign direct investment (FDI) route is not misused to gain entry in sectors which are restricted,Assocham today said. "There have been cases where shareholding of a foreign investor is below 50 per cent but it happens to be the promoter or single largest shareholder since the balance shareholding is widely held by domestic institutions or public," the chamber said. In such situations,an Indian company can be effectively controlled and managed by a foreign entity even with minority shareholding,it said. "The existing definition of control is inadequate. There should be a comprehensive checklist of controlling factors to eliminate FDI flowing into undesirable sectors," it said. In some instances,the shareholding is equally distributed between Indian and foreign investors in compliance with government approval. But as per memorandum or articles of association of the company,the whole board of directors is appointed by a foreign investor. There have also been cases in which a foreign investor provides guarantees to Indian lenders and gets effective management control of the company. According to the Industry Ministry,a company is considered as "controlled" by resident Indian 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 in that company. An entity is considered as "controlled" by "non-resident entities",if non-residents have the power to appoint a majority of its directors.
