Editorial: Controlling FDI

Too many controls and the FDI will disappear

On the first of next month, Prime Minister Manmohan Singh is supposed to review various sectoral caps on FDI and, as preparation to that meeting, economic affairs secretary Arvind Mayaram has submitted a discussion paper arguing for doing away with various equity caps. The broad principle is a simple one: remove the cap if doing so makes life easier for the foreign investor without materially affecting the level of control the government wants the foreign investor to have. Since, under Indian company law, a 26% shareholding allows an investor to veto special resolutions and a 51% shareholding allows majority control, shifting the 26% cap to a 49% level makes absolutely no difference to the government but allows the foreign firm to bring in more capital. Which is why Mayaram has recommended changing the 26% cap to 49% for defence, FM radio and the print media. Moving from 51% to 74% similarly, still allows the Indian partner to block extraordinary resolutions, so why not move the cap? Which is why the Mayaram committee has suggested the FDI cap for multi-brand retail be hiked from 51% to 74%. Moving a 74% cap to 100% is the one case where there is a difference since Indian shareholders will no longer be able to block special resolutions, but at 74%, the foreign investor is pretty much running everything anyway?which is why, for telecom, the recommendation is that the 74% cap be hiked to 100%.

The problem is that, at the same time, other wings of the government are dancing to a completely different tune. The industry ministry has still not come out with a clarification on whether multi-brand retailers have to invest 50% of their total investment in back-end infrastructure; nor is there any clarity on whether a foreign retailer will have to find a new local SME supplier?30% of sourcing is mandatory from SMEs?when its investment in plant and machinery exceeds $1 million. If a Walmart is hesitant to come into the country due to these reasons, why will it want to come in even if it can invest 74%? In the case of the Jet-Etihad deal, the government clearing more bilaterals with Abu Dhabi is what helped clinch the deal, but the proposed venture is now stuck because of lack of clarity on whether Etihad is in effective control of the proposed JV?which is why Jet-Etihad is in the process of reworking the agreement. But how does this exercise square with the Mayaram recommendation that 100% FDI be allowed in aviation? In the case of telecom, where the entire sector is in trouble thanks to unfriendly government policies, surely a beginning can be made by referring the base price for 2G auctions to the Trai once again? In the current environment, with no clarity on whether 3G intra-circle roaming is to be allowed, on whether 2G licences are to be automatically renewed, among a host of other issues, why would any foreign investor want to take its share up to 100%? Presumably the Prime Minister will ask his Cabinet colleagues, and the bureaucrats under them, some tough questions.

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First published on: 20-06-2013 at 01:25 IST