The Foreign Investment Promotion Board (FIPB) is learnt to have deferred taking a decision on the application made by Max India’s Analjit Singh and former Vodafone Essar CEO Asim Ghosh, as the finance ministry is of the view that the proposal could be interpreted as “treaty shopping”.

The finance ministry also wants other ministries — commerce and the Department of Telecommunications (DoT) — to give a “reasoned recommendation” rather than just a “no objection”.

Singh and Ghosh had sought to sell 49% each of their holdings in two investment companies that indirectly own stake in Vodafone Essar.

While Singh wants to divest in Scorpio Beverages, Asim Ghosh had applied to FIPB for offloading 49% in AG Mercantile.

A foreign direct investment of Rs 530 crore is expected through Scorpio Beverages and Rs 330 crore through AG Mercantile, if the proposals are cleared.
If and when FIPB clears these proposals, Vodafone, which bought 67% in Hutch-Essar more than two years ago, would inject funds into the companies of its minority shareholders — Asim Ghosh and Analjit Singh. 

While the Department of Industrial Policy & Promotion (DIPP) in the commerce ministry has conveyed its no-objection to the proposal, subject to Press Notes 2, 3 and 4, the Department of Revenue (in the finance ministry) has objected to the proposal “on the grounds of treaty shopping”.

Treaty shopping refers to cases where investors from countries with relatively higher rates of tax use the Mauritius route to bring investments to India, taking advantage of India’s double tax avoidance treaty with the island nation.

The Department of Telecommunications (DoT) and the Department of Economic Affairs (in the finance ministry) also requested for a deferment, according to sources.

FIPB took up these proposals during its last meeting on October 9, and is scheduled to discuss the applications again on October 30.

According to the Department of Economic Affairs, all the documents related to the proposal need to be analysed better to observe compliance with the recent Press Notes 2, 3 and 4 issued by DIPP in letter and spirit.

It also urged both DoT and DIPP to arrive at a “reasoned recommendation” rather than simply conveying its no-objection to the FIPB.

Earlier, concerns were raised in many quarters, including in the finance ministry, over the recent DIPP Press Notes, which changed the method of calculating the total foreign investment in an entity. The finance ministry had pointed out that the sanctity of sectoral caps was being lost because of the new norms to calculate FDI.

The new guidelines replaced the conventional method of calculating foreign indirect equity by the parameter of beneficial ownership and control of entities at each stage of investment. As per the new norm, FDI routed through an Indian company owned and controlled by resident Indians will not be taken into account while calculating sectoral limits.