Sitting in our office, savouring a hot cup of coffee while watching the droplets of rain water trickle down the window, we welcomed the advent of the monsoon in Delhi. Monsoon is traditionally perceived as a season-altering wind, bringing respite and relief from the sweltering heat.

The latest Discussion Paper (DP) issued by the Department of Industrial Policy & Promotion (DIPP) on ‘FDI Policy — Rationale and Relevance of Caps' on July 23, garnered a comparable appeal, both from industry and experts.

The current DP, ninth in the series, examines the key elements of our foreign direct investment (FDI) policy. The DP, opening with a chronological commentary on the evolution of FDI Policy in India, elucidates the underlying principle of ‘equity caps, entry routes and conditionalities' and finally addresses the distinction between ‘ownership' and ‘control'.

Furthermore, the DP also discusses the perplexities arising on account of the extant policy guidelines surmising that downstream investment made by Indian companies (owned and controlled by resident Indian citizens) shall not be counted as indirect FDI. The DP concludes by questioning the effectiveness of enforcing a sectoral cap in FDI and bringing out a clear case for abolishing all caps below 49 per cent.

GERMANE ISSUE

This brings us to the germane issue if the equity caps serve any purpose other than limiting the ‘control' of a foreign player in an Indian company. Legally speaking, an equity holding of 26 per cent is as beneficial or ineffectual as a 49 per cent stake, as in both the cases the shareholder is entitled to similar levels of control.

Taking this logic a step further, there seems no special merit in retaining sectoral caps between 51 per cent and 74 per cent, because the controlling rights at both those levels too remain the same.

To counter mischief caused by sectoral caps, interesting propositions such as compulsory listing of multinational companies on stock exchanges with a stipulation of offloading equity within a pre-determined timeframe are being propounded by the DP. The DP also seems to be inclined towards adoption of sectoral regulatory conditions, as against equity caps. Simply stated, instead of having an equity cap for a particular sector, the Government may now exercise powers to impose pre-conditions in various operational facets of an organisation.

These may include compulsory appointment of resident Indian citizens on the boards of management / top-level managerial positions in sensitive sectors, getting prior clearance from the relevant Ministries (like, in the case of Media, from Ministry of Information & Broadcasting) of all non-resident Indian personnel proposed to be inducted as members of the board or key executives of the Indian company and providing unconditional permission to the Government agencies to inspect the facilities, amongst other similar conditions.

It would be interesting to note how the foreign investors would react to such propositions, especially considering that India is the only major country in South Asia where FDI inflows have fallen during 2010.

Having mostly debated and forecast the dispositions of foreign investors, an ostensibly inconspicuous topic of ‘arbitrage by Indian partner' seems to be creating a lot of din recently.

ARBITRAGE ISSUE

The issue gains significant curiosity, having been discussed by the DIPP itself in its DP, as harbingering a ‘cost for the consumer' and ‘coming in the way of the country deriving ideal benefit of FDI'.

Intriguing times await us, considering that if all sectoral caps below 49 per cent are abolished, Indian companies (Indian-owned and Indian-controlled) having up to 49 per cent foreign equity participation or their downstream ventures, may not be precluded from carrying out activities such as multi-brand retail, defence or media.

Therefore, to that extent, the existing multi-layered organisational structures established by multi-national companies operating in India would need to be re-evaluated. Now, what remains to be seen is if the removal of sectoral caps (if implemented) will lead to an increase in foreign direct investment inflows.

Industry experts seem to have a different notion on the subject and the future is only anyone's guess.

(The authors are Director and Manager respectively, KPMG.)

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