Composite caps a good idea, now hike them to 100%
The reasons for caps on various kinds of foreign investment—FDI, FPI or NRI—have never been convincing, more so since this just created arbitrage opportunities. Which is why, the government’s decision to have a composite cap—accommodating investments by both strategic and financial investors—is welcome. Freeing up the sub-limits will help firms attract more foreign direct investment which is always desirable, and also to raise more capital from portfolio investors where there is room to do so. The government has also offered automatic approval for portfolio investments up to 49% in all sectors where the foreign investment cap is at that level or above.
In the past, foreign portfolio flows were frowned up as being fickle but that perception has changed, with such flows continuing to remain strong even when the going hasn’t been that good. There will be players across sectors that will be delighted with the change in the rules, but none more than banks—banking stocks soared on Thursday since FPIs can now buy up to 74% of a listed stock. In the case of multi-brand retail, there was an apprehension that FPI investment may not be permitted through the automatic route—the UPA allowed 51% FDI through the approval route—but this has been allowed up to 49% only. As for firms like Tesco who have invested more, the government has ensured there will be no disruption by grandfathering such investments.
Given the scarcity of both capital and technology, of course, it is hard to understand why the government is so reluctant to encourage this, especially in sectors like insurance and defence. In the case of insurance, India is badly under-insured and could do with more insurance capital as well as competition. And in the case of defence, a higher cap—even 100%—through the automatic route would encourage greater transfer and assimilation of technology. Indeed, in most sectors where FDI caps are not 100%, it is really the foreign partner that is driving the business, so why bother with having a local partner who is really just deriving monopoly rent for being an Indian face—in some high-profile cases, the financing of the Indian partner’s holdings were based on help from the foreign partner. This is needless arbitration that also needs to go.