New Delhi: Last week’s proposal to rework foreign direct investment (FDI) guidelines came in the face of opposition by the finance ministry to the changes that remove barriers to the backdoor entry of investment in sectors such as telecom, and failed to meet the government’s aim to keep it simple and consistent.
These inconsistencies could become a political liability for the Congress-led United Progressive Alliance as the opposition parties, as reported in Mint on 13 February, are seeking to join issue with the government.
A copy of the discussions in the cabinet and among the group of minister (GoM) was reviewed by Mint, and it showed that finance ministry representatives did not believe there was a case to dilute rules on calculating indirect foreign ownership in telecom. The move to dilute entry rules flows out of the controversy surrounding foreign telecom company Vodafone’s majority investment in 2007 in Hutchison Essar Ltd. A senior official of the government who was a part of Foreign Investment Promotion Board (FIPB) during the Vodafone case told Mint on Tuesday that the recent FDI change was at odds with what was suggested by bureaucrats after the telecom company got FIPB approval.
In the meetings, a representative of the finance ministry even suggested increasing existing FDI caps as an alternative to the proposal to dilute control in calculating indirect holdings. Increasing FDI would at least be more transparent on getting a sense of the real extent of control, the representative said.
When the reworked FDI guidelines first came up for debate in the cabinet committee on economic affairs in October and November, the proposal had the support of the Planning Commission, telecom ministry and ministry of corporate affairs. The corporate affairs ministry, however, suggested terms in the proposal such as “control” needed to be clearly defined. The finance ministry and information and broadcasting ministry opposed the proposal from the beginning.
Subsequently, the cabinet asked a GoM to iron out the differences. In the meetings of the GoM, P. Chidambaram, who had by then been moved to the home ministry from finance, and Anand Sharma of the ministry of information and broadcasting expressed concern about the move. The GoM in a meeting towards the end of December forged broad principles, including the need to keep it simple and make it consistent between sectors. Since different sectors are governed by differing norms, this desire for consistency has not been fulfilled as the insurance sector has been singled out.
The reworked FDI guidelines considers firms considered Indian till date but where majority ownership is in the hands of foreign institutional investors (FIIs) and overseas shareholders, as foreign companies.
Two prominent examples are ICICI Bank Ltd and Housing Development Finance Corp. Ltd (HDFC), where the management is Indian, but the majority stake is with foreign entities. Both these entities have subsidiaries in the insurance sector.
The reworked norms do not apply to the insurance sector where the only rules that apply are those put in place by the Insurance Regulatory and Development Authority (Irda). So far, Irda does not take ICICI Bank or HDFC’s FII holding into account while calculating indirect foreign holding.