you're reading...

Easing FDI rules will enhance trade

The year 2010 will be remembered across India for multiple reasons and notable among them is India’s newly-assumed position as a key international trading partner. When the US President acknowledges India’s rise as a global power and declares that India has emerged, not just in Asia, but across the world, people all around take note.

In such circumstances, it was no surprise that in less than six months, we played host to Prime MinisterDavid Cameron, President Barack Obama, President Nicolas Sarkozy, Premier Wen Jiabao and most recently President Dimitry Medvedev. One common agenda of all these visits was bilateral trade and an expectation that India further ease its FDI rules. Hence, as we approach the new year, it may perhaps be wise to once again objectively evaluate our current FDI rules to see what other changes can be introduced.

Currently, all foreign investments into India are regulated by the consolidated FDI policy (policy). The consolidation, first undertaken in March 2010, pulls together in one document all previous acts, regulations, press notes, press releases and clarifications issued either by the department of industrial policy and promotion (DIPP) or the Reserve Bank of India (RBI) where they relate to FDI into India.

The consolidation exercise, a huge endeavour on the part of the DIPP, is a step in the right direction and hence deserves much appreciation. What also merits praise is the initiative of the DIPP to only make changes to the policy on a biannual basis, as opposed to the previous practice of issuing ongoing notifications. Hence, the most recent policy came into effect on October 1, 2010.

Under the extant policy, investments into most sectors fall under the automatic route. Such investments require no prior permission of the government or any regulator and the Indian company receiving the foreign investment is only required to intimate the RBI of any such investment.

The FDI rules applicable to such sectors are, therefore, fairly clear and unambiguous. But some sectors still require prior government approval and it is here that the rules may be accused of being somewhat complicated. What needs to be appreciated is that most sectors that require government approval fall within the ‘sensitive’ category and hence it is essential to balance FDI with concerns of national security. Similar restrictions also exist in some developed countries where there is a potential of national security being compromised.

Hence, has the policy continuously been ‘incremental and progressive’, as stated by the Indian commerce minister? As a practitioner, I can unequivocally say, absolutely! In fact, one also has to agree with him that many changes have been made to the policy in 2010 itself.

But still some matters seem to have missed the attention of the DIPP and require immediate remedial action. The foremost among them is the issue of ‘ownership’ and ‘control’ of an Indian company. Especially, when the Indian company has both non-resident investment and investment from a resident Indian company, and where such resident Indian company further has non-resident investment.

Given that in the computation of indirect foreign investment, among other things, the investment made by FIIs and that made through ADRs and GDRs is also included, the question will arise on how will this affect investment by such resident Indian companies in sectors like telecom or banking where there is still a cap on foreign investment and ownership. Also, how would the regulators take to investments by a resident Indian company, owned and controlled by a resident Indian or an Indian company, but where the ownership and control is through a multi-layered structure and through non-resident investment participation?

Another important issue requiring immediate attention of the DIPP relates to the upfront determination of price of ‘capital’ instruments at the time of issuance. Under the policy, the definition of capital includes fully, compulsorily and mandatorily convertible preference shares and debentures.

What is now expected is that these convertible instruments must comply with the pricing guidelines (following the discounted free cash flow method) both at the time of their issuance, as also at the time of their conversion. Practically, to ensure compliance with the pricing guidelines on both sides may sometimes prove to be a challenge. It would thus be extremely helpful if the regulatory intent behind this rule is clarified and the record set straight on the compliance requirement.

Before critics say that the US or any other foreign trading partner cannot dictate Indian investment policy, let us note some facts which demonstrate that it is in India’s long-term economic interests to further hone the policy. The US is India’s largest trading partner in goods and services, and India is now among the fastest-growing sources of FDI entering the US.

On the flip side, according to data released by the DIPP, cumulative FDI flows into India in the last decade have been in excess of $175 billion. Of this, the US accounts for a staggering 7% of the total inflows, behind Mauritius that leads the table accounting for 42% of the total inflows owing to the favourable double-taxation agreement we have with this Indian Ocean Island.

French President Sarkozy’s visit, close on the heels of the US President’s visit, also highlighted the need for India to open more of its sectors to FDI. France, which contributes to 2% of the total FDI inflows into this country, considers India as a long-term partner. It’s not unreasonable for it to expect India to reciprocate meaningfully on trade ties.

Under these circumstances, there is a need for greater economic cooperation between India and its international trading partners.

Given the steady manner in which the commerce ministry has transformed the policy, one hopes it will take note of the need to further ease the FDI rules so that no one can accuse it of being opaque or complicated. Fortuitously, the further easing of investment rules will go a long way to help spur the next phase of India’s own economic growth.

First Published in the Economic Times on December 28, 2010



No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: