It is just as well that the Government has decided to do away with its convoluted method of determining the extent of foreign investment in a domestic enterprise. An enterprise was deemed to be half owned by foreign interests if 50 percent of the total capital invested in that enterprise came, in equal measure, from two entities with respective foreign ownership stakes of 75 and 25 percent. While such an approach looks elegant in theory, in practice it ignored the fundamental reality of management control that doesn’t seep through layers of investment in the manner contemplated in the official norms. For instance, the 25 percent foreign stake in the second entity may be of little consequence in so far as the exercise of voting power in the target enterprise is concerned, as that will be dictated by domestic investors controlling the balance 75 percent stake. The new regime rightly will not consider investment by such companies as foreign.
While this attempt at simplification is welcome, it is not clear whether the Government indeed wanted to open the gates for the flow of foreign investment in far greater measure than its own sector-specific limits on ownership in select industries/services allow today. On a strict reading of the guidelines spelt out by the Government in its Press Note it appears that a foreign investor could use an investment vehicle to gain a toehold in sectors such as retail (where FDI is banned) or substantial control in other sensitive sectors in association with pliant domestic investors in such a way that it doesn’t breach the investment ceiling. All that is needed is that the Board of Directors of the target enterprise be so constituted that it is not inimical to the foreign investor’s interests. If the Government wanted to ease these sector-specific limits on foreign ownership, it could have done so openly rather than constructing this loophole. And why has it queered the pitch with the additional stipulation that it be informed of the ownership particulars even where such investments are to be allowed under the so called ‘automatic route’?
A liberal economic policy demands that operational aspects of State regulation be left to autonomous authorities such as the Reserve Bank of India or the Insurance Regulatory and Development Authority. The Government’s decision to involve itself in individual transactions of foreign investments not only militates against this principle but also renders independent regulators superfluous in the larger scheme of things. The timing couldn’t have been worse as the global investor community is gripped by a crisis of confidence besides restricted access to credit markets. The focus should be on transparently easing the flow of foreign investments rather than creating loopholes or new hurdles.
0 comments:
Post a Comment