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Swayed by sectional interests

The revised guidelines notified by the Central government following policy changes in respect of foreign direct investment incorporate significant modifications in computing the total FDI component in Indian companies and in determining the related issue of transfer of ownership or control from resident Indian citizens to non-resident entities in sectors with caps. The very definition of ‘Indian company’, for the purpose of these rules, has undergone some impor tant changes. Whereas all investment by a non-resident entity in an Indian firm will be counted as FDI, downstream investments by an Indian company that has foreign investment but is “owned and controlled” ultimately by resident Indians will not be reckoned as FDI while determining the sectoral caps. Owning a company implies a 51 per cent shareholding and beneficial ownership, while ‘control’ means power to appoint a majority of members to the board of directors, besides ability to legally direct the operations. It is widely apprehended that these can be easily circumvented by, for instance, packing the board with unofficial nominees of the foreign shareholders — a prospect that has major implications for the flow of FDI. While presenting the interim budget for 2009-10, External Affairs Minister Pranab Mukherjee said that, despite the global financial crisis, FDI inflows during April-November 2008 aggregated $23.3 billion, a 45 per cent rise over the tally for the corresponding period in 2007. More recent figures however point to a slowdown.

Projected as an attempt to boost the FDI flow and make it consistent and homogenous across sectors, the new guidelines are expected to provide companies owned and controlled by Indian citizens a huge opportunity to bring in FDIs and then make downstream investments without worrying about sectoral caps. To the criticism that foreign capital is being brought in through the back door, the government’s answer is that the existing sectoral caps — like the one for insurance — remain untouched. Moreover, it is pointed out that the government’s approval is mandatory for transferring ownership and control of Indian companies to foreign entities. But the new provisions do suggest that in sectors where FDI is currently prohibited — such as multi-brand retail and real state trading — the entry of foreign capital has been allowed. There is also no convincing explanation for the government rushing through the major changes that impact politically sensitive sectors without any serious debate or deliberation. The impression is inescapable that with elections round the corner, it has acted in haste at the behest of sectional interests.

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