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Saturday, 27 April 2013 10:42
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Overhauling FDI policy is long overdue


Given how finance minister P Chidambaram has travelled from Singapore to Washington to woo foreign direct investment (FDI) over the past few months, his planned cleaning up of FDI norms can’t come a day too soon. Apart from the distinction between FDI and FII that needs to be cleared up given that all it has done is to encourage regulatory arbitrage by disguising one as the other, there are several meaningless FDI caps in different sectors of the economy, ranging from 26% in the case of insurance to 100% in the case of single-brand retail. In the case of some of these sectors, like insurance, the cap is written into the Act that governs it and so requires Parliament’s approval—in most other cases, executive action is possible. The caps are ostensibly based on different clauses in Indian law but are of little practical relevance. At 26% ownership levels, a promoter (Indian or foreign) can block a special resolution—so the idea of keeping a 26% cap for FDI in insurance is to ensure the foreign promoter can block a special resolution by a rogue Indian partner for instance. At 51%, a promoter gets control of the company, so a 49% cap is to prevent a foreigner from getting control of the local JV. In which case, what is the relevance of the 26% cap, why not raise this straightaway to 49%, more so since this makes raising money from the foreign partner that much easier? Since a foreign company is as much in control of a JV with a 51% equity as it is with 74%, keeping the FDI cap at 51% makes little sense. Similarly, if the FDI cap is kept at 74%, presumably the idea is to allow the Indian JV partner to block a special resolution by the FDI partner. But since, at 74%, the foreign partner is pretty much driving the business as well as funding it, what sense does it make to give the local partner the ability to block a special resolution with a 26% equity? In the case of Vodafone India, for instance, surely it cannot be anyone’s case that the foreign firm does not control and run the Indian outfit? Let’s not forget, whether the FDI cap is 26% or 100%, the company continues to be answerable to Indian authorities and has to comply with the law.

There are then the issues relating to definition. In the case of AirAsia’s proposal, the aviation ministry appears to be arguing that the policy allows FDI only in existing projects and not in new ones. An equally inexplicable definition is the one relating to brownfield and greenfield pharmaceuticals FDI. FDI is allowed automatically for greenfield pharmaceuticals projects but needs approvals in the case of brownfield ones. The rationale for the approvals is, apparently, to ensure a foreign firm buying an existing Indian pharmaceuticals firm (brownfield) does not stop producing the price-controlled drugs made by the local firm. That sounds sensible in theory but given the largest Indian pharmaceuticals firm doesn’t have a market share of more than 5-10%—and there are at least 5-10 producers for the majority of medicines—what is the government trying to protect? If the finance minister is able to clean up the mess over FDI caps, this will go a long way in attracting FDI into the country.


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