Amidst all the scandals that rocked Parliament, cutting short a crucial Budget session, comes the refreshing news that one section of it, at least, is hard at work at the reforms. The Department of Industrial Policy and Promotion (DIPP) has modified the guidelines relating to foreign direct investment (FDI) that should enable some easing of capital flows into the productive economy.
At the outset it should be mentioned that the DIPP has left the contentious issue of FDI in retail trade untouched; the status quo of 51 per cent in single-brand retail trade is here to stay. However, the DIPP has redrawn some of the rules relating to ownership, as well as the relationship between parent and subsidiary, in terms of operations and holdings. The shelving of Press Note 1 is a welcome move as it was often used as a barrier by domestic companies to prevent their foreign joint venture partners from setting up independent operations in the country. In a departure from past practice, foreign firms will be allowed to operate on their own alongside joint ventures, without having to seek the approval of their Indian partners. Whereas earlier, overseas forms had to specify upfront the price of convertible instruments, now they can prescribe a formula for the conversion into equity of debentures, partly paid-up shares and preferential shares, subject only to FEMA and in accordance with SEBI laws. Assuming that names are important, the DIPP has also assigned new terminologies to the rather clumsily named “investing companies” and “operating companies” or the combination of “investing-cum-operating companies” with more direct and clear-cut terms such as “companies owned or controlled by foreign investors” and “companies owned and operated by Indian investors.” As is evident, the DIPP has sought to assign distinct identities to foreign companies, give them some more power — for instance, in the pricing of convertible instruments — and cut away some of the red tape. As the DIPP notes, some of these are necessary for the flow of FDI to be channelled through a “policy framework that is transparent, simple, clear and reduces the regulatory burden.” The Department stresses that its policies are meant to enable the flow of foreign direct investment into a strategic “lasting interest' in the management of the enterprise. But its reforms also enable foreign investors to create independent enterprises and management, and that is important for capital to flow where local enterprise is wanting.
Tweaking ownership contexts, however, is not enough; removing bad policies on the ground — and there are enough that prevent funds flowing into sectors that badly need them — is equally important. But that means policymakers other than DIPP have to bestir themselves from their stupor of inaction.