Roll out the red carpet to welcome foreign capital | VCCircle

Roll out the red carpet to welcome foreign capital

BY  Lalit Kumar, 
For attracting foreign capital, additional reforms are required--both in legal and administrative processes--which can ensure a complete makeover of India’s eroded image.

“No room for pessimism as fundamentals of the economy are intact and the government is moving ahead on the reforms path,” said the finance minister P Chidambaram recently. His reason of optimism about reforms is the likely revision in the FDI policy based on the recommendations of a panel headed by the economic affairs secretary. The DIPP has already initiated consultations on those recommendations and some announcements are expected by the end of this month. Will that evaporate the pessimism is a big question. Can a mere reform only in the FDI policy turn the tide in favour of India?

Undoubtedly, the finance minister’s statement is encouraging in these turbulent times and so is the intention of the panel’s recommendations for major changes in the FDI policy to oil the slowing engine of Indian economy to attract foreign capital to bridge the current account deficit and to arrest the faltering rupee. The measures recommended include complete foreign ownership of Indian telecom companies and raising FDI caps in a number of sectors including crucial ones like defence production, multi-brand retail and aviation. These measures are the need of the hour and could attract some foreign capital in the short run and may give the much needed relief to cover the gap in the current account deficit. But is that what is really needed? What about the long run? Will these measures completely restore investors’ confidence in India? These are some questions that need answers.

The pile up of the gloom experienced by foreign investors hasn’t happened overnight; so to expect that things will change overnight is highly ambitious and unrealistic. Don’t forget the chaos, uncertainty and perception generated about India Inc in global investment community when the tax law was amended (and that too retrospectively!) to overturn the ruling of the apex court in the high profile Vodafone case.

India has appetite and deserves much more FDI than it gets, a simpler regime for foreign investors could reasonably achieve that. If mere raising the FDI caps can result in increased foreign capital inflow then that should have happened after the reforms announcement made in September 2012 when sectors like multi-brand retail were opened and foreign airlines were permitted to take stakes in Indian carriers. It is a known fact that not a single multi-brand investment has come although the queue of foreign retailers waiting to set up shops in India is only getting longer; and all that they expect is a clear, unambiguous and liberal policy to make investments in India. That isn’t much of expectation when their billions dollars are at stake. On the foreign airlines front, two foreign airlines have already committed stakes in Indian carriers but still both investments have yet to see the light of the day and no foreign capital has so far been infused by them. One of them is stuck on the issue of who controls the Indian carrier which is still being debated and interpreted and in the other case, a letter of protest has already (and surprisingly) reached the prime minister’s office challenging the investment on the ground that FDI policy only permits investments in brownfield aviation companies and not in greenfield joint ventures. The basis of this protest is nothing but a unique placement of a ‘comma’ in the FDI policy which is interpreted to mean that FDI is only permitted in brownfield companies and not in greenfield companies; further, it is challenged on the ground that approval of the ministry of defence was not sought. Mind you, all this is happening after the FIPB has already granted its approval to the said foreign airline for its proposed joint venture with Indian partners in a greenfield aviation company to be set up in India. Basis all of this, it shouldn’t come as a surprise and should answer the question why India ranks 132 out of 185 countries ranked by the World Bank for ease of doing business. India’s major competitor China ranks much ahead at 91 and interestingly its archrival Pakistan is ahead at 107. Tiny Nepal also ranks ahead of India. This is a sad finding for India but reasons are also obvious.

Why can’t a conducive investment climate be ensured for foreign investors to make hassle-free investment? Why do policies and its implementation have to be so difficult and uncertain?

Foreign investors face major roadblocks such as uncertainties in laws; for instance, a genuine put option in their favour is treated as if they have advanced debt to the Indian company. This is a long standing issue. Why has no guidance been issued so far to clarify the position? Then, a genuine indemnification payment made to a foreign investor is not permitted and is viewed as if the foreign investor is illegally repatriating the invested funds from India. Foreign investors wonder why at all they are given contractual rights to seek indemnification when they cannot take the payment out from India.

There are long delays in getting investment approvals as different regulators are involved; the old promise of the government that there will be a process of single window clearance hasn’t been implemented so far. Multiple regulators result in different views; for instance, different regulations have different meaning of foreign ‘control’ over an Indian company. Of course, all of this creates confusion. Therefore, much is needed to be done and only reforming the FDI norms may not offer a complete solution to the scarcity of foreign funds in India. In order to really attract foreign capital, additional reforms are required both in legal and administrative processes which can ensure a complete makeover of India’s eroded image and if this is achieved, then FDI, which is a real long-term capital will on its own find way to India. 

(The author is a partner with J. Sagar Associates. Views are personal.)

To become a guest contributor with VCCircle, write to shrija@vccircle.com.

Comments

Sanjay Kumar

Interesting Read.

I agree. Just by increasing the % of FDI in a certain sectors, things won't change. The government needs to adopt a wholistic approach towards attracting forgein capital. The policies, law and the approach need to be aligned to make India an attractive market.

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