Financial Daily from THE HINDU group of publications
Thursday, Jan 13, 2005
Financial Daily from THE HINDU group of publications Thursday, Jan 13, 2005 |
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Stock Markets Markets - Foreign Institutional Investors Money & Banking - RBI & Other Central Banks Industry & Economy - Taxation Reddy moots capping FII inflows — But not in favour of the move at this stage Our Bureau
"There is merit in our keeping such an option open... "
Mumbai , Jan.12 DR Y.V. REDDY, Governor, Reserve Bank of India, today called upon the Government to have an option to impose a ceiling on FII inflows or even taxing them. However, he later clarified that the RBI was not in favour of imposing such a ceiling at this stage and that the effectiveness of taxes was arguable. Observing that the magnitude of FDI/FII flows are tending to be large and volatility has perhaps increased, Dr Reddy said, "A view needs to be taken on the quantity and quality of FII flows. While quotas or ceilings, as practiced by certain countries, may not be desirable at this stage, there is merit in our keeping such an option open and exercising it selectively as needed, after due notice to the FIIs." He said price-based measures such as taxes could be examined though their effectiveness is arguable. Dr Reddy was speaking at the release of the India Development Report of Indira Gandhi Institute of Development Research. He said there is scope for enhancing quality of flows through a review of policies relating to eligibility for registration as FIIs and assessment of risks involved in flows through hedge funds, participatory notes, sub-accounts, etc. Strict adherence to `know your investor' principle, especially in regard to flows from tax-havens, including beneficial ownership would enhance quality. FDI flows, as currently defined, also include transfer of equity from residents to non-residents and a disaggregated analysis of FDI through several routes could enable a policy-intervention, as appropriate on quantities and quality, he said. Reporting and monitoring arrangements could be considered for assessing the aggregate shares of residents and non-residents in larger corporates and those in sensitive sectors in particular. Since there are several routes by which non-residents can hold shares and voting power over Indian corporates, such monitoring could help timely policy responses on several fronts. He said that a view could be taken on the relative policy emphasis on sources and types of investment that need to be encouraged. For example: giving better incentives to foreign investors over domestic investors results in scope for `round-tripping' (the term used for Indian money being sent abroad and brought back as foreign investment). Similarly, if avenues for portfolio flows or equity-transfers from domestic to foreign investors are easily available and attractive, the flows under FDI defined in terms of adding to domestic production capacities will tend to be smaller. Attention to these may simultaneously address micro or institutional issues relating to capital flows and financial markets ensure high-quality inflows of foreign savings, which is more important to the country at this stage of development. Nearly 60 per cent of the reserve accretion in the current financial year has come in two months (November and December 2004) perhaps indicative of the volatility in portfolio flows.
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