NEWSLINKS
BUDGET 2000
BUY BUDGET
Y2K BIZ FEATURES
INDIA & THE W.T.O.
NEW GOVERNMENT
SPECIALS
INTERVIEWS
COMMENTARY
CREDIT POLICY
BUDGET 1999-2000
USEFUL INFO
ARCHIVES
SEARCH REDIFF

Indirect curbs on FDI irk foreign investors

Neena Haridas in New Delhi

Corporate India is thrilled that the government has decided to make foreign direct investment automatic in all except a few sensitive areas. However, a section finds the decision to not allow automatic approval to multinationals that already have a joint venture in India, distressing.

According to the government decision last week, foreign direct investment will be allowed through the automatic route. Items not open for automatic approval fall under four-categories:

• Those requiring industrial licences (alcohol, cigarettes, defence-related eqipment, drugs and pharmaceuticals, mining of gemstones and items reserved for small scale sector)
• Proposals in which the foreign collaborator already has a joint venture/tie-up.
• Proposals where a foreign/ NRI/OCB investor seeks to acquire shares in existing Indian companies.
• Proposals falling outside notified sectoral policy/caps or under sectors where FDI is not allowed.

Now, it is the second clause that has irked most multinational companies. Says the country-head of a consumer durables MNC which has a joint venture in India: "There is no rationale behind this restriction. Now, most of the MNCs have about 74 per cent stake in an Indian arm. Now, what is the logic for 74 per cent and not 100 per cent? None really, except for one which has little relevance. Under the Companies Act, a shareholder who has 24 per cent equity can block any special resolutions proposed by the company's board.

"Therefore, the logic goes, if foreign investors don't have 100 per cent equity, any special resolutions of theirs can be blocked if they are found to be detrimental. But since it is difficult to define what is detrimental and to whom, it seems that the 74 per cent ceiling has been put for the sake of putting it."

Says Ryan Karanjea, corporate lawyer, "Even if this restriction is aimed at blocking the multinational's full control, it is unlikely to happen."

Logically, when the MNC has 74 per cent stake, it will ensure that the balance 26 per cent is held by several shareholders. In which case, all the board resolutions will go through. So why complicate matters by putting in the clause?

Coming down heavily on the Indian bureaucracy, a senior official of an MNC says, "Much of these restrictions are the handiwork of bureaucrats in various ministries who still wish to retain their stranglehold over the economy. Now that they have been pushed to the wall, they are reluctantly agreeing to liberalisation, but are still maintaining a toe-hold, hoping to use this to their advantage at a later date. Obviously, this will still make investors think that India is not serious about opening up."

It may be recalled that the automatic route was approved in the pharma and mining of gemstones sectors to upto 74 per cent. The rest will have to go through the Foreign Investment Promotion Board. Interestingly, Industry Minister Murasoli Maran had earlier promised that the FIPB would be abolished.

According to the new government decision, all FDI proposals through the automatic route will only have to take clearance from the Reserve Bank of India. FDI proposals for manufacture of items under the negative list will, however, have to get clearance from the FIPB.

Besides, the areas in which FDI proposals would have to go through the FIPB route include all items which require an industrial licence under the localisation policy notified by the government in the New Industrial Policy of 1991 as wells as for all items reserved for manufacture by the small scale sector in case the foreign investment is above 24 per cent.

The government's decision to open up the automatic route is aimed at bringing FDI of $10 billion. According to government sources, the target will be met considering that even with all the restrictions, India generated FDI of about $4.016 billion during the calendar year 1999.

The increase in FDI during 1999 was attributed to the GDR and foreign currency route bond route amounting to about $1.5 billion.

Business