The recent set of proposals emerging from the department of industrial policy and promotion in New Delhi give the impression that the government is keen on tightening rather than loosening the rules for investment in the Indian market by foreign investors. This is surprising, since its official stance has been in favour of simplifying the foreign direct investment (FDI) regime. Sure, the new proposals sound pretty much like a simplification measure. In FDI-sensitive sectors like telecom, financial services, infrastructure and aviation, the government wants to replicate the media sector model of an instantly identifiable ?single largest Indian shareholder?, whose equity holding in any business must be big enough as a block to ensure complete control. The objective, as this paper reported, is to sort out the Byzantine patterns of stratified holding companies and cross-investing group companies that corporates allegedly use to obfuscate the actual reins of control in any venture. Indeed, some of these structures are mazes that only their creators can figure out, and they also offer a convenient route for promoters to bring in foreign funds without government alarms going off on FDI limits. It?s time to straighten things, claims the government.
But wait. The idea of simplifying FDI rules was not to make things simpler for the government, but for investors. The new proposal fails this test. For Indian principals to consolidate shareholdings in a ?single largest? entity would require them to restructure themselves, and in an era of business freedom, it should be for market forces rather than government rules to incentivise structural simplicity. Also, it certainly does not simplify corporate life to have to demonstrate direct domestic control of a business, while all the government should be concerned about is the level of foreign shareholding. Strict monitoring of the Indian end of the business would be meddlesome, to say the least, and could even give the Centre yet another lever of control it does not deserve. The proposal represents a retrograde step that owes its origin to a desire on the government?s part to simplify shareholding patterns in its own sweet interest. To simplify the FDI regime for investors, India should bifurcate all sectors into two categories: where FDI is allowed 100%, and where it is totally barred. Or institute some variation thereof.
