The United Progressive Alliance (UPA) government announced changes to foreign investment norms last week in a dying bid to boost capital inflows into the country. Instead, these alterations, designed to skirt the issue in an election year, may just keep foreign investors away from India’s shores.
Vittorio Colao, CEO of British telecom giant Vodafone—which is battling a $2 billion tax case over foreign investment—noted last month that India’s “rules are extremely complex and open to various interpretations”. The government has now added to the complexity.
Central to this complexity is the interpretation surrounding the ownership and management of companies. If “Indian companies which are ‘owned and controlled’ ultimately by resident Indian citizens” make further downstream investments, foreign holdings in that company may not count towards the foreign direct investment (FDI) cap. That could well mean that a company with 51% FDI that is run by Indians can make 100% downstream investments without any obstacle.
FDI so far has been subject to sectoral caps, which governments have been incrementally relaxing. After these changes, the government seems to have approved 100% investment, as long as it is transmitted indirectly. Has India gone from partial capital controls to no controls overnight?
The department of industrial policy and promotion issued two press releases after the announcement to clarify details. But these releases have prompted more questioning, especially surrounding downstream investment. Such investment was previously automatic but will now require approval from the Foreign Investment Promotion Board. Besides increasing the board’s powers, this change also adds to its bureaucratic load: More cases mean more time for approval, and hence, investment.
Opposition parties, including the Left Front, have assailed the government for circumventing Parliament to make these changes. This is a key point. If India wants to attract more foreign investment, it must do so in a transparent fashion where rules and regulations are clearly defined. That’s the legislature’s job; an executive fiat, that too so vague, leaves investors scratching their heads.
What do the new FDI norms mean for India? Write to us at email@example.com