Column: Stick to the line of control

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SummaryIndian capital controls are amongst the most complex in the world.

Just redefine foreign investments by whether or not they seek to control the company they are in

Indian capital controls are amongst the most complex in the world. In this area the Indian bureaucracy blindly marched on in the spirit of the licence permit raj of the 1970s. Today, the system has become so tangled that it is difficult to implement all the various conflicting rules in place. Simplifying the system requires implementing the UK Sinha working group on foreign investment through current initiatives such as the Sebi working group on QFI, and the Arvind Mayaram group on FDI definition.

The gentle reader is requested to read the next few tortuous paragraphs, in order to get a sense of the scale of complexity that has been constructed in the Indian capital controls. Foreign investment into India has been cut up into a maze of categories. Foreign investors are classified as: Foreign Institutional Investors (FIIs), Foreign Venture Capital Investors (FVCIs), Non-Resident Indians (NRIs), Qualified Foreign Investors (QFIs) and Foreign Direct Investors (FDI). FDI includes a sub-route involving issuing ADRs/GDRs or foreign currency convertible bonds. Sebi, RBI and the finance ministry make rules and regulations governing foreign investment. Investment by each subcategory of investors in each sector has to be continuously monitored.

The FDI framework consists of acts, regulations, press notes, press releases and clarifications, etc. The Department of Industrial Policy and Promotion (DIPP), ministry of commerce & industry, frames policy on FDI through press notes which are notified by RBI as amendments to the FEMA regulations. To bring some clarity, DIPP attempts to consolidate the various circulars on FDI in a consolidated policy statement (which has unclear legal authority). Often, it seems to get tangled in the issues with other routes of investment. While FDI is permitted up to 100% in most sectors under the automatic route, in other sectors there are sectoral investment caps.

In addition, the rules cross reference each other. For example, RBI regulations on FIIs state that an individual FII can purchase up to 10% of the equity of a company and all FIIs together can hold up to 24%. In

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