A recent observation of the Reserve Bank of India (RBI) has made top executives in corporate India sit up, take notice, and wonder whether our investment rules are too restrictive for our own good. In a set of frequently asked questions (FAQs) on overseas direct investment published recently, the central bank has said that Indian companies are barred from acquiring a stake in any offshore company if that firm has investments in any Indian entity. It does not matter how big or small the foreign entity’s holding in an Indian enterprise is. The ownership of even a single share would put it on the no-go list for Indian investors. Although no formal order or circular to this effect has been issued, an RBI clarification on an FAQ board effectively sets a policy that can at best be described as controversial. The aim of this restriction is purportedly to check the round-tripping of money, a cash laundering tool, since criss-cross investments that span multiple jurisdictions can potentially serve as conduits for dubious funds to be sent abroad and brought back into the country in some legal guise. The stricture could also be a clamp on tax evasion done by setting up firms in countries with easier tax regimes to hold assets of Indian companies that make money off the domestic market. If such practices are rampant, then specific probes need to be ordered, evidence gathered, and cases filed. But banning investments in foreign businesses that have Indian interests amounts to disproportionate action.

In this era of globalization, the collateral damage of such moves to the economy could outweigh the gains. As a result of the clampdown, even legitimate businesses wanting to expand their operations globally could find their plans thwarted. It’s not just future investments that could get affected. Those already made could also come under the scanner. Complying with the rule would be difficult for any enterprise with even moderately complex dealings abroad. An Indian exporter looking for an equity partnership with a foreign distributor, for example, would not only have to check if the latter has made any investment in India, it may need a special agreement that prevents the offshore entity from investing in a domestic set-up. In a world where such business decisions are freely made, the very oddity of the clause could possibly play deal-breaker. Other problems could arise as well. The foreign subsidiary of an Indian company would not be able to directly invest a surplus generated abroad in a domestic venture of its choice, even though such an investment would be above board.

For decades after independence, over-regulation was the bane of enterprise in India. Liberalization offered a large measure of relief, with whole categories of restrictions dumped in favour of greater business freedom. Of those that remained, many have been eased since. In the past five years, the country has made major gains on global rankings which measure the ease of doing business. Regulatory over-tightening, however, not only puts those achievements at risk, it suggests a reversal of a trend that has made the country stand out as an attractive destination for business. Rather than dampen investor confidence in the Indian policy environment, it would be better to track down round-trippers and tax evaders. One doesn’t burn the barn down to smoke out a rat.

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