The Department of Industrial Policy and Promotion’s, or DIPP’s, latest proposal on allowing foreign direct investment (FDI) in “sensitive” sectors represents a classic half-solution to a festering issue. It has suggested that FDI in these sectors – multi-brand retail being the principal one but also defence and media – should be allowed via an indirect downstream route. Under this route, ingeniously thought up in Press Notes 2 and 4 of 2009, entities with up to 49 per cent FDI and controlled by Indians can invest in these areas through downstream units. So, if Walmart, for example, wants to set up a chain in India, it only needs to invest in a holding company with an Indian partner who holds 51 per cent which will, in turn, invest in a downstream entity that actually operates the retail chain. The purpose of this two-step process, DIPP’s discussion paper explains, is to distinguish between equity and control, which somehow remains with Indians under the cover-all shibboleth of “national interest”. Any investor will immediately see through this charade. As Indian promoters well know, there can be a world of difference between equity holding and control. In any case, under the Companies Act, any equity holding greater than 25 per cent gives the investor a right to block a “special resolution”, so the question of limiting “control” for investors of any provenance above this limit is academic. Press notes 2 and 4 may be creative, enabling mediums for FDI but they have hardly changed the FDI landscape precisely because they do little to create the kind of healthy transparent regime that should make India an investment of choice. The scope they create for rentiering by Indian businessmen is also wide — a proclivity that can be seen in sectors as diverse as oil and telecom.
Indeed, the DIPP is clearly not convinced by this solution. The paper has questioned whether those activities that can now be done indirectly through downstream investments can as well be allowed to be done directly. It makes the important point that “through an inverted pyramid structure of downstream investments, the level of indirect FDI can be even more than 49%”. Then it follows this line of reasoning to question whether there is any relevance left for equity caps, especially below 49 per cent. This recommendation, certainly radical by government standards, has important implications for a range of sectors, especially insurance, an industry that has patiently been waiting for parliamentary approval for an enhancement in FDI limits. But it is worth wondering why, in this 20th year of economic liberalisation, sectoral equity limits on FDI are not done away with altogether. Should the government have reservations about “national interest”, it can always, as the DIPP paper suggests, exercise control through sectoral regulations in sensitive sectors. Noel Tata said as much in an interview to Business Standard where he suggested that FDI in multi-brand retail be linked to square footage. The case for scrapping sectoral limits is persuasive for many reasons, not least of which is dwindling FDI since 2008; it is the only major developing country that saw FDI drop in 2010. So flashing the welcome signals now would be a good way to show that India still means business.
