The Hindu Business Line : Cap the foreign investment muddle

THE DECISION OF the Foreign Investment Promotion Board to defer consideration of the Max India proposal is symptomatic of the muddle in the official policy on sectoral caps on foreign investments. If the investment is routed through a vehicle created specially for the purpose, it can by no means be certain that it still retains the character of an investment in some real sector, such as telecom or aviation, in contrast to it being treated as an investment in a finance business. The situation gets even more complicated if the special purpose vehicle has other business interests that are not subjected to any investment cap. For, then, the Government has the added burden of setting up a rigorous monitoring mechanism to ensure that there is no diversion of funds away from the stated purpose. And even if detected the subsequent unravelling of the investment pattern to make it conform to something else could turn out to be a long drawn out affair, as the Coca-Cola experience demonstrated.

If these were not enough the Government has needlessly complicated the situation by spelling out a criterion for the insurance sector, which virtually makes nonsense of the sectoral cap on foreign investment stipulated for this sector. It has adopted the income-tax definition of a `foreign' company, which has no relevance at all in this context. The income-tax law decrees that for an entity to be regarded as not `foreign' it only has to ensure that it declares dividends in the country and also makes arrangements for its payment locally. By this criterion even an insurance venture with 100 per cent foreign ownership but incorporated under Indian laws can stake a claim to be treated as a non-foreign entity. The logic is clear. The income-tax law concerns itself only with subjecting incomes to domestic taxation rather than the source of capital that generated the income. Against this backdrop any attempt by the Government to lay down a different yardstick for enforcement of ownership ceiling in other sectors exposes it to the risk of being struck down by courts as arbitrary.

But quite apart from legal nuances of how investment caps are to be enforced, there is a more fundamental problem of the Government having to wrestle with the distinct lack of appetite for risk among domestic entrepreneurs who got into businesses that are subject to foreign ownership limits as joint venture partners. They need an exit option. It may be argued that they should have known what they were getting into and that as such cannot demand that public policy be altered to suit their commercial interests. While that may be technically right, the fact remains that these businesses were not without their operational and strategic challenges that could not have been fully visualised by an entrepreneur entering an uncharted area. For nearly five decades, the Government had reserved these sectors for exclusive exploitation by the public sector. This has only made the task of understanding the complexities of these businesses that much more difficult for private entrepreneurs. Clearly, the situation calls for a more nuanced approach to a resolution of the problem confronting domestic investors in these sectors.

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