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The Indian Engineering giant Larsen & Toubro and its ambitious plans to tap the defence sector through its joint venture with EADS of Germany has been upset due to the issue of routing of the equity and foreign direct investment (FDI) in the venture.
The Foreign Investment Promotion Board (FIPB) of India has apparently found discrepancies in the nature of investment in the venture and rules related to FDI.
The FIPB has figured out that although total FDI coming directly in the venture between L&T and EADS is below 26 per cent, the remaining equity is also being routed through the services joint venture wherein the foreign collaborator has a 49 per cent stake.
The FIPB indicated that the proposed joint venture will be 24.5 per cent owned by EADS, 51 per cent by L&T Technologies and 24.5 per cent by L&T.
FIPB pointed out that although the proposed venture called L&T Technologies would be owned and controlled by the Indian partner, it opens the possibility of having foreign equity in the manufacturing joint venture up to 49.49 per cent.
Under current FDI guidelines in India, FDI in a company engaged in the services and manufacture of defence-related products is allowed up to 26 per cent, but it requires prior approval of FIPB.
The FIPB has stated that the current move by the proposed joint venture violates the Press Note 2 of 2009 which states that if total foreign ownership through FDI or through Foreign Institutional Investor (FII) in any company is less than 50 per cent, it will be treated as an Indian firm.
Any investment made by this firm will be treated as Indian investment. This means that the foreign investment in a company, as long as it is less than 50 per cent, would not be counted as foreign in any subsequent investment made by that company.
However, L&T claims that the proposed venture will be a different firm in which L&T, as a group, will have 51 per cent stake. So, there’s no way by which EADS’ holding in the manufacturing firm will exceed 24.5 per cent, either directly or indirectly.
The FIPB has now directed Department of Defence Production (DoDP) and Department of Industrial Policy and Promotion (DIPP) to verify if the control and ownership of the two joint venture’s will remain with L&T and that foreign equity holding meets the norms.
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