Freeing FDI

While there's clearly pretty bad news awaiting us on the fiscal deficit, the government's done well to go ahead and push forward with the ...

While there8217;s clearly pretty bad news awaiting us on the fiscal deficit, the government8217;s done well to go ahead and push forward with the other reforms steps within its control. Just a few days after it decided to privatise Indian Airlines and successfully broke the port and power strikes, the Cabinet decided to further liberalise the rules for foreign investment.

Though the Cabinet8217;s decision is well short of Industry Minister Murasoli Maran8217;s original promise of scrapping the Foreign Investment Promotion Board FIPB, the government has now made foreign investment automatic in all areas except for a few items in a negative list comprising explosives, alcohol, cigarettes, defence-related items and atomic energy. Similarly, there will be automatic approval for foreign investments which seek to have up to 74 per cent of equity in firms in mining and prospecting.

Foreign investors in pharmaceuticals will also be allowed to hold up to 74 per cent equity in firms and will get automatic approvals for this.With this, the government hopes to attract investments of up to 10 billion annually. Good job.

What8217;s a bit worrying at the same time, though, is the rationale behind the decisions, or rather behind retaining certain restrictions. Take the case of allowing foreign investors to get automatic approval for investing in a firm in which they have under 74 per cent equity. What8217;s the logic for 74 per cent, and not 100 per cent? None really, except for one which has little relevance. Under company law, a shareholder who has 26 per cent equity can block any special resolutions proposed by the company8217;s board. Therefore, the logic goes, if foreign investors don8217;t have 100 per cent equity, any special resolutions of theirs can be blocked if they are found to be detrimental.

Two points must be made here. First, detrimental to whom? What are these resolutions that need to be blocked, and which can be seen as anti-national? Since it8217;s difficult to imagine what these could be, it8217;s clear that the 74 per cent limit hasjust been put there for the sake of being put. Second, even if blocking the multinational8217;s full control was the government8217;s aim, this won8217;t happen. Logically, when the MNC holds 74 per cent equity, it will ensure the balance 26 per cent is held by several shareholders. In which case, all their board resolutions will go through! So why complicate matters by putting in the 26 per cent clause? The same 74 per cent ceiling is also to apply to prospecting and mining of gemstones. Our objections to this are the same as for pharmaceuticals.

Essentially, much of these restrictions are the handiwork of bureaucrats in various ministries who still wish to retain their stranglehold over the economy. Pushed to the wall, they are reluctantly agreeing to liberalisation, but are managing to retain a toe-hold, hoping to use this to their advantage at a later date. Needless to say, it is because of this attitude that investors still aren8217;t convinced that India8217;s a hot investment destination.