|Remove the fig leaf|
|Saturday, 25 June 2011 00:00|
What can be done indirectly, should as well be allowed to be done directly.” That quote, from the industry ministry’s latest discussion paper on sectoral caps for FDI, captures how far India’s FDI policy has gone, albeit in an opaque manner, and the direction in which the government wishes to go. The discussion paper is the sixth (in a series of 8) of a welcome trend of discussing new policy options on FDI and inviting public comment—an earlier paper sought views on allowing FDI in multi-brand retail after giving its pros and cons. The sectoral caps-discussion paper points out that once the government made the distinction, in 2009, between ‘ownership’ and ‘control’, it pretty much made rubbish of all sectoral caps anyway. In 2009, the new rules said that as long as Indians had a 51% stake in a firm, any investments made by this firm in downstream companies would be considered to be Indian—in effect, depending upon the number of layers of holding companies, foreign investments could go to any level, never mind the sectoral cap.
The problem with the paper, however, lies in what it proposes as part of the conversion of the de facto to the de jure. The argument the paper makes is that what matters is “not the percentage of beneficial equity but the level of control in a company”, and then it goes on to suggest various types of alternate sectoral regulations—such as insisting that top employees be Indians—that could be used. This is sophistry, and pretty meaningless at that. One, if a foreigner is investing more than 51% in a company through a series of holding companies, it does strain credulity to think all control rests with Indians—if an Indian firm doesn’t mind acting as a front for a foreign firm, it’s fair to assume an Indian CXO will also do exactly what the foreign investor wants. Two, is the industry ministry saying a telecom firm, for instance, with an Indian CEO is more likely to follow India’s laws than a telecom firm with a foreigner CEO? Or take the suggestion that, in the case of pharma, a condition could be put on pricing or production before approving FDI—imagine the havoc this would create and the scope for discretion. The industry ministry would have done well to point this out—to argue the pharma case, when the largest Indian firm has a market share of just 6-7%, how does it getting bought over by a foreigner really matter? Plus, there are, in any case, a plethora of regulators whose sole job is to ensure firms, whether Indian or foreign, play fair. It’s a pity the industry ministry’s discussion paper isn’t bold enough to point this out.