New Norms To Spur Fdi Flow

According to the norms, foreign companies will be allowed 100 per cent equity participation where the Indian partner is unable to raise resources for expansion or technological upgradation.

This is good news for many foreign companies, which have been keen on investing in their Indian ventures, but were refrained from doing so as their domestic partners did not show any enthusiasm in making similar investment.

Take Maruti Udyog Ltd (MUL) for example. Suzuki, its Japanese partner, has been insisting on expansion for quite some time now, but the governments unwillingness to fork out its share due to lack of resources, has been the major hurdle.

Does this mean that Suzuki will now be able to raise its stake in Maruti Udyog Ltd ? There is a catch here.

Although the Foreign Investment Promotion Board (FIPB) can recommend Suzukis plan to raise its investment resulting in a hike in the equity of the company, the government may still not approve it. Nevertheless, many foreign companies will now be emboldened to put that extra pressure on their Indian partners to shell out more capital and even threaten them with a buy-out.

The new norms will also allow foreign companies to enhance their stake in Indian companies to more than 51 per cent. Hundred per cent foreign equity will be permitted in cases where the foreign company has expressed inability to find a suitable Indian joint venture partner.

In this case, it is not very difficult to convince the Foreign Investment Promotion Board that there is no domestic partner. Since foreigners will have a majority stake, divesting the required 26 per cent stake of its equity within three to five years would not hurt their interest.

Full ownership has also been allowed in cases where at least 50 per cent of the production is exported.

Since India has the advantage of cheap labour, many multinationals may make India their production base.

Though on paper everything sounds good, the scenario would not improve unless politicians change their attitude towards foreign investments.