The report of the working group on foreign investment, commissioned by the ministry of finance and headed by UTI AMC chairman UK Sinha, has recommended a slew of welcome measures to simplify the complex maze that governs foreign investment (other than FDI) in India. For a start, it suggests a simple rule for distinguishing between FDI and other foreign investment?any investment that amounts to less than 10% in the total shares of a listed or unlisted entity will qualify as foreign portfolio investment, while any investment over 10% will qualify as FDI and will, therefore, be governed by the rules that govern FDI. The effort to simplify rules is evident in the committee?s recommendations on the classification rules for different foreign investors. The committee suggests abolishing the distinction made made between FIIs, foreign venture capital investors and non-resident Indians, and the separate rules that currently govern investments made by each of these investor classes. And the committee recommends a single window clearance for all classes of investors. The suggested Qualified Foreign Investors framework requires all investment to be routed through qualified depository participants (DPs) that will have a global branch and agency network. The DPs will be required to enforce an OECD-standard of know-your-customer norms. Of course, the DPs themselves will be tested for ?fitness? by Sebi and will be required to adhere to higher capital requirements. Overall, the recommendations, if implemented, will prevent entities from exploiting regulatory arbitrage and prevent them from camouflaging themselves to fit into a more ?convenient? category.
But will the recommendations be accepted? That probably depends a lot on how RBI views these recommendations. Interestingly, RBI opted out of being represented on the UK Sinha committee. And there are reasons RBI will resist these recommendations. At the moment, RBI has almost unlimited powers to interpret FEMA while taking capital account measures. RBI need not even offer a written explanation for its decisions. The committee recommends that RBI be held more accountable for its decisions, not only through explanations but also through the institution of an appellate panel that can hear appeals against decisions made by RBI. The recommendations, if implemented fully, will also make it harder for RBI to use the exchange rate as an instrument of monetary policy. That is without doubt a good thing. The report has set the stage for perhaps another turf battle between the finance ministry and the central bank. In the interest of promoting foreign investment, the finance ministry should come out on the winning side.
