Will CMS Info Systems need to trim foreign shareholding?

With the government clearly defining private security agencies, private security and armoured car services in the latest consolidated FDI Policy, there could be a possibility of cash management company CMS Info Systems being compelled to trim its current foreign direct investment (FDI) to 49%.

At present, foreign PE firm Baring Private Equity Asia holds more than 90% stake in CMS Info. Whereas, the prescribed FDI limit for private security agencies and cash management and transportation firms that operate on license obtained under the Private Security Agencies Regulation Act, 2005 (PSARA) is 49%.

According to a source, who spoke on condition of anonymity, the clarifications in the latest Department of Industrial Policy and Promotion's (DIPP) circular on FDI were issued to check the "misinterpretation or aggressive interpretation" of the policy that CMS has taken.

"Before this, the government had never defined these terms. CMS did an aggressive interpretation because of which the government had to clarify its position and the definition of armoured car services," he said.

The recent government's circular on FDI says, "for the purpose of FDI policy on the sector terms, private security agencies, private security and armoured cars will have the same meaning as provided under the PSAR Act, 2005".

It defines armoured cars services as "the service by deployment of armed guards along with armoured cars and such other related services, which may be notified by the central government or as the case may be, the state government, from time to time".

Responding to dna query, a spokesperson of CMS Info said, "We would also like to clarify that CMS only uses cash vans and not armoured vehicles to conduct its business".

CMS did not specify whether it would prune its FDI or would maintain a status quo.

"CMS Info Systems is the largest ATM cash management company in the country. We have got to this position basis the trust we have built with our customers, partners and other stakeholders by operating within the rules and law prescribed for this sector," said the spokesperson.

In 2015, Baring Private Equity Asia had acquired about 90% stake in CMS Info Systems from Blackstone and Grover family after getting a nod from the FIPB, MHA and other ministries.

But later, the officials at the ministry of home affairs (MHA) had found that CMS Info allegedly "misrepresented facts" in its application to bring in foreign investment from Baring in 2014.

As per the information obtained by the MHA, despite holding a license under the PSAR Act at the time of applying for FDI approval, CMS had claimed that the PSAR Act did not apply to it, and therefore, the 49% FDI ceiling did not hold for them.

The MHA had taken a strong stand that a firm or an association of persons cannot be issued a license under the PSAR Act if it is not registered in India or has a proprietor or majority shareholder partner or director, who is not a citizen of India.

It had also, in its mails to various agencies, clarified that sub-contracting of armed guards or any element of cash logistics or cash management did not allow a company to not comply with the PSAR Act. The MHA had issued this clarification because CMS had taken a position that they hired their guards and therefore did not fall under the purview of the Act.

"There is no provision under the PSAR Act 2005 for hiring the security services and providing it to a third party, which amounts to circumventing the provision of the PSAR Act 2005. Therefore, a private security agency having a valid license is entitled to provide security services directly to its clients and not to an intermediary party, which carry on the business as a middleman passing on the said security services to a third party," said an MHA letter written in May 2015.

The ministry had also emphasised that every cash logistics company is "bound" to "obtain" a license under the PSAR Act before starting its operation.

But many experts believe that the DIPP has failed to clear the ambiguity on whether companies providing cash logistics or cash management services come under the PSAR Act and are bound by the prescribed ceiling for FDI.

According to a reliable source, the MHA has created a working group to articulate the guidelines for cash management services companies under the provisions of PSAR Act.

However, Devraj Singh, partner, EY India, said the policy very clearly states that if the activities mentioned in the policy were being carried out by a company, then the policy would apply to it, otherwise not.

"That is why it has been clarified in the policy that if they are doing the activity of armoured car services then they will be covered in the under policy, otherwise not," he said.