An Over-Cautious Rbi

Exit prices should be a matter between the buyer and the seller. In its concern to prevent collusive pricing, the RBI has decided to treat all investors as potential colluders. That reasoning lies behind its decision to tag a 40 per cent discount on the price-earnings (PE) multiple and the price to book value multiple. Why should the average PE of the Bombay Stock Exchange National Index be any guide? Foreign investors pick unlisted companies only if they think that they will give them more than average profits to compensate for the risks being run and the long wait for the company to start performing. Expecting these companies to trade at average price-earnings ratios is therefore absurd.

The crux of the matter is that foreign direct investment, instead of being accorded preferential treatment for its long-term nature, is made less attractive than foreign portfolio investment.

While foreign institutional investors (FIIs) are allowed to exit at any price they may strike, other investors are prevented from doing so. Second, when an FII wishes to exit, it can get a certificate from the custodian which will also indicate the tax it has paid - the tax procedure is unclear for foreign direct investors. Third, in several industries, there is a dividend balancing requirement, i.e dividends must be paid out of export earnings. This is another factor holding up FDI.

The finance minister is reported to have expressed the hope that FDI flows will soon add up to $10 billion. If that $10 billion has to come in driblets of Rs 20 lakh, the there are no pricing restrictions, the country has a long wait ahead.