That’s pretty much all that artificial FDI caps achieve
Both Vodafone Plc’s erstwhile Indian partners—Ajay Piramal and Analjit Singh—as well as the telco itself, appear happy with the R10,142 crore deal that has resulted in Vodafone Plc getting complete control over the Indian subsidiary. What this means for Vodafone is that, when the telco plans an expansion, it will no longer be held hostage to its Indian partners’ inability to bring in their share of the equity. In the case of Ajay Piramal, selling his 10.97% stake gives him a 52% return in two years. Analjit Singh got a lot less for his stake, but still earned a nice return—Singh got paid less as the shares came with debt attached to them, debt which had, in turn, been guaranteed by the telco itself.
Now that the transaction is over, the question that needs to be asked is why the FDI cap had ever been put at 74%. Apart from ensuring that foreign investors such as Vodafone have to look for Indian partners to hold a 26% or 49% stake—who, in turn, benefit from the company’s expansion or the MNC buying them out later—there is no logical explanation for these type of equity caps. In most such cases, the business is run by the foreign firms; and in many cases, even part of the funding of the local partner is arranged by the foreign firm. Thanks to Press Note 2, the funding has become even easier. A foreign company can now invest 49% in a JV controlled by an Indian firm—that meets the requirement of the caps—and any downstream investment by the JV will be considered to be Indian. Yet, the JV is free to take on debt from the foreign firm, effectively allowing the investment to be Indian-controlled while being foreign-financed. Other loopholes, such as in the case of e-commerce, add to the mess—while FDI is not allowed in the B2C arena, B2C firms have B2B arms in which FDI is allowed, neatly allowing them to circumvent the spirit of the law.
Nor is it quite clear what the 26% Indian shareholding was meant to achieve since the only thing this can prevent is the passage of a special resolution which shouldn’t really bother the government anyway. As far as Vodafone, or any other firm is concerned, all that should matter to the government is how it complies with the law—on providing intelligence agencies intercepts, for instance—and having a 26% Indian shareholder is irrelevant as far as this is concerned. Similarly, while allowing foreign investors to hike their stake from 26% to 49% confers no extra powers on them, it allows them to infuse capital to grow the business. Even if you assume 51% is a magic threshold which MNCs should not be allowed in certain cases, there is absolutely nothing to be achieved by stopping foreign equity at 51% and not letting it go all the way to 74% or even 100%. At a time when political parties are hurling charges of crony capitalism, the term ‘nameplate capitalism’ best describes the meaningless FDI caps in place at the moment.