The DIPP, under the Commerce and Industry Ministry, has proposed that while determining if a company has breached the sectoral FDI ceiling, the indirect foreign investment in an investing Indian company should not be included if it is owned and controlled by resident Indian companies.

To illustrate the point better: Consider HDFC Standard Life Company, an insurance joint venture (JV), promoted by India's HDFC and UK-headquartered Standard Life. In insurance, India allows 26 per cent FDI, so technically Standard Life can hold 26 per cent in the JV. But, Standard Life originally held a partial stake in HDFC itself and this translated into an indirect foreign holding in the insurance JV. So, it had to restrict its holding in the insurance JV to 18 per cent. Subsequently though, Standard Life sold its stake in HDFC, and the insurance regulator allowed it to pick up the entire 26 per cent in the insurance JV.

Under the new norms proposed by the DIPP, Standard Life could have taken 26 per cent in the JV and still retain its holding in HDFC. In fact, this issue became quite controversial in the case of many Telecom JVs in India, Essar-Hutch being one. A pyramid holding structure, with foreign equity participation in layers of Indian companies, can technically take the total foreign holding in the operational company much beyond the prescribed sectoral levels.