Tata-Corus deal a milestone for FEMA

WITHOUT CONTEMPT

Last week marked a historical milestone for evolution of law-making in India . No new law came to be legislated. In an emphatic statement for Indian business, Tata Steel's bid to take over world steel major Corus was accepted by the latter's board of directors. If completed, the deal would make the Tatas the sixth largest steel-makers in the world, up from the current 56th rank.

At a deal size of $ 8 billion, this is indeed the largest ever cross-border acquisition by any Indian company. Just days ago, the finance minister had said that Indian industry had acquired overseas businesses worth $ 10 billion this year. This deal alone adds 80 per cent over that number.

However, the route to taking over a listed European company abroad could require negotiating many twists and turns, and surely there would be a lot of homework to complete. Another Indian overseas deal may outweigh or outsize this one. But this column is not just about this deal "� it is about celebrating the recent evolution of an important branch of Indian business law.

Till less than seven years ago, Indian industry was shackled by severe constraints of exchange controls in the form of the Foreign Exchange Regulation Act (FERA). A law that was enacted to conserve foreign exchange, it rigorously regulated outflow of foreign exchange from India . Worse, it had draconian provisions. Violation was a criminal offence. Worse, FERA had a special provision that led to a statutory "presumption of culpable mental state" "� in other words, the stated stance of the law was that every Indian was always deemed to have a criminal bent of mind and an intention to violate this law.

FERA as a criminal law was dreaded and the Enforcement Directorate was alleged to be markedly inhuman. Industrialists often went underground, got hospitalised or sought anticipatory bail, fearing arrest. The Act, however, did not achieve its stated economic objective. Private banking flourished and smart politicians and industrialists collectively kept the channels of outflow well-oiled.

FERA continued to remain alive for nine years after the economic reform process was set in motion in 1991. It regulated how much money you could take when you left Indian shores, what you had to do when you returned, whether you could physically carry a share certificate abroad, and of course, how could you consider setting up any business unit overseas. The ability to have a foreign presence was mired in applications, middlemen, government contacts, approvals and filings.

In 1999, the Foreign Exchange Management Act (FEMA) was passed, but the fear of letting FERA go persisted and FEMA was not brought into effect. Indeed, some in Indian industry are said to celebrate July 1, 2002, as the "real Independence Day." That was the date on which the statutory prohibition on any court or officer to take fresh cognisance of any past FERA violation took effect. For those less colourful, July 1, 2000, when FEMA came into force, was good enough. The foundation for harbouring legitimate global dreams had been laid.

Over time, the ability to remit money abroad to set up or acquire foreign businesses has been systematically liberalised using powers under FEMA. Limits on remittance linked to export earnings gave way to limits linked to the remitter's networth. Regulations under FEMA also freed the ability to raise foreign debt. While foreign borrowing has end-use restrictions (only for application in capital expenditure within India ), it can be adopted for funding overseas acquisitions.

The true impact of unshackling exchange controls in this context may be measured from one simple statistic. This year, the value of Indian investments abroad has been higher than the value of foreign investment in India . According to The Economist, Indian residents acquired overseas businesses worth $18.7 billion this year while foreign capital worth approximately only $8 billion has flowed into India in the same period. Not all of the Indian shopping bag may involve physical outflow of money from India (many acquisitions are leveraged and funded by foreign borrowings), but if capital were to have the nationality of the investor, Indians have invested more money buying foreign businesses this year than foreigners have invested buying Indian businesses.

Another telling statistic is that the value of $18.7 billion is not restricted to deals like those of the Tatas. This value is estimated to be spread across over 130 deals. Therefore, just as every Tom, Dick and Harry abroad hungrily looks at a slice of the 9 per cent economic growth action in India, every Shukla, Mishra and Tiwari in India now has the ability to seriously contemplate buying foreign businesses.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)

somasekhar@jsalaw.com