FDI caps may be breached on dividend default

Puja Mehra

To attract foreign direct investment, the government is likely to allow a breach of sectoral caps for companies that do not pay dividends to their preference shareholders under Section 87 of the Companies Act, 1956. At the same time, it is considering an amendment to the Act allowing such companies in sectors characterised by long gestation periods to pay dividends to their preference shareholders despite low or no profits.

Top government officials told Business Standard that "the option is likely to be discussed at a meeting to be called by the finance minister shortly." The commerce and industry minister, telecommunications minister and the law minister are likely to attend the meeting.

The other options available are to continue with the present rules and allow the sectoral cap to be breached or to amend the Act to block the conversion of preference shares into ordinary shares with voting rights for companies governed by sectoral caps, the officials added.

The former is being opposed by the domestic lobby as it would mean that the foreign investors would gain a say in the day-to-day management of the company and the latter would scare away precious and little FDI inflows into the country, the officials said.

"Foreign investors do not invest in Indian companies for charity. They invest in preference shares to get returns on their investments in the form of dividends or voting rights in absence of dividends. All FDI would stop if the conversion is blocked," a senior official said.

The committee of secretaries headed by the cabinet secretary had asked the department of company affairs to prepare a cabinet note to propose blocking of conversion of preference shares into ordinary shares with voting rights in companies with sectoral caps. The note has already been prepared and circulated amongst the concerned ministries for their comments by DCA.

At present, section 87 of the Companies Act, 1956 grants voting rights to preference shareholders if the company does not pay dividends on cumulative preference shares for two years and on non-cumulative preference shares for three years.

The amendment would have put to rest CDC Financial Services' claim for voting rights in BPL Cellular. The Mumbai High Court has, by way of an interim order, ruled in favour of BPL cellular.

In 1998, BPL Cellular had issued non-cumulative non convertible redeemable preference shares of face value $ 41.3 million to CDC subject to the 49 per cent FDI cap in the telecom sector.

BPL could, however, not pay any dividend due to recurring losses. CDC subsequently sought to invoke its right to exercise voting on all resolutions of the company. BPL argued that allowing CDC voting rights would tantamount to increasing the FDI limit beyond 49 per cent and go against the policy.

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