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Easing, not reform

The government should focus on due diligence and do away with foreign investment caps.

By: Express News Service |
Updated: July 20, 2015 12:00:51 am
FDI, FPI, FDI in India, India FDI, India FPI, FII India, FDI investment in India, venture capital funds, NRI investment funds, business news, investment news, india news, indian express, indian express editorial, The government should focus on due diligence and do away with foreign investment caps.

The government has done well to come out with a composite cap for foreign investments that does away with distinctions between FDI (foreign direct investment), FPI (foreign portfolio investment), venture capital funds, non-resident Indian and other such non-debt overseas investments. All these will henceforth be clubbed together and be constituted as a composite cap subject to overall sector-specific foreign investment ceilings. This rationalisation is eminently sensible, given that the distinctions between various categories of foreign investments were based on the flawed logic that FPIs represent “fickle” investment as opposed to more “solid” FDI in plant, machinery and technology. The experience of the last two decades shows that foreign institutional investors have rarely undertaken equity sell-offs or exited in hordes. On the contrary, they have stayed invested in India, the proof of which is in their cumulative investment of over $227 billion since November 1992, the bulk of it ($169 billion) in equity. Even the run on the rupee in July-August 2013 had to do with FIIs selling in the debt rather than equity markets. The alleged “fickleness” of investments, if such a thing can be posited at all, is more about debt versus equity as opposed to FDI versus FPI.

Viewed against that backdrop, the approval for a composite cap marks a step forward in providing flexibility to issuers of capital, simplification of rules and greater transparency. Indeed it may lower the overall cost of raising capital for local firms. The existing system was cumbersome, with separate sub-ceilings for different sets for investors — on top of different sector-wise limits on total foreign investment. The latest move, in a sense, is more about relaxation than real reform.

What the government needs to do next is to look at greater easing of sectoral limits on foreign investment, including in defence or multi-brand retail. Most of these caps are based on old fears about multinationals taking over, while the evidence suggests that they stimulate domestic investment through creation of forward and backward linkages. Policy should now focus only on due diligence and ascertaining credentials of investors in the form of KYC.

Simultaneously, there is a need to be more mindful of debt flows, even while leaving it to Indian companies (and foreign investors) to choose the form of equity capital they wish to access (or invest in) and manage any risks arising from that.

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First published on: 20-07-2015 at 12:00:49 am
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