Editorial: Irrelevant distinction

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Updated: March 2, 2015 2:44:07 AM

Composite foreign investment caps a good idea

Given the armed forces’ tremendous demand for arms and ammunition, it is not surprising that most leading Indian manufacturers have been trying to make inroads in the sector. Except that, when the UPA was in power, most of them found their projects getting stuck for one reason or the other. In the case of Reliance Industries Limited, whose subsidiary wanted to manufacture rocket launchers and flight control systems, for instance, the proposal got stuck since FIIs owned 17% of the parent firm’s stock. At that time, while the rules permitted FDI levels of 26%, they did not permit any FII holdings. The then defence minister AK Antony’s view, endorsed by the Cabinet, was that if FII holding was allowed, enemies of the nation could also gain an entry into the defence business—the antecedents of FIIs, it was argued, could not be easily checked. The problem with the argument, however, was that this also kept away genuine investors since most of India’s top firms have some level of FII holdings at the parent level.

Which is why finance minister Arun Jaitley took the right decision when, as part of his Budget speech, he said the government planned to do away with the distinction between FDI and FII as far as investments in Indian companies were concerned. So, in cases like banks where, for instance, there is an overall 74% foreign investment cap along with a 49% FII cap, FIIs can now buy up to 74% of the equity—this is one of the major reasons for why bank stocks went through the roof on Budget day. As a result, several private sector banks now find that FIIs can pick up a lot more of their stock. In the case of power exchanges, similarly, while the current law allows a 49% foreign investment cap, the sub-cap is 23% for FIIs—in this case, FIIs can now go all the way up to 49%. Apart from the fact that this will give a boost to stock markets as FIIs find there is more room for them to buy certain stocks, the larger point is the distinction was really an artificial one. Corporate veils are difficult to pierce in even the case of FDI, and it is not true either that while FDI flows are more stable, FII flows are more fickle—if things go bad, there is nothing to stop FDI investors from cashing out either.

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