False dawn for investors


“The expansion of the automatic list of foreign direct investment will create an India fever, like the China fever” — Union industry and commerce minister Murasoli Maran on February 2.

They believed the man who sold the dream. Now, three months after being told that India would rival China in the global investment race, it’s not hard to see that it was just another false dawn for a country that needs more funds than controls.

Foreign investors, many of whom took Maran for his word, felt that they could pour money in volumes not seen before and, more important, do it in a large variety of sectors. But those who fell for his visions of grandeur, have realised it was little more than a spell of delusion. Days before he went to town about the expansion of the FDI automatic list, the canny minister quickly inserted a negative list of items.

This ensured that no funds would flow into the listed areas without mandatory clearance from the FIPB — the body which vets proposals under the negative list on a case-to-case basis.

Now, potential investors are realising the list is so expansive in its scope that a range of activities remain virtually closed to foreign funds through the automatic route because of cumbersome procedures and regulatory niceties.

For instance, the negative list includes all proposals where an industrial licence is required, where foreign investment is more than 24 per cent, in items reserved for the small-scale industry (SSIs) and in cases a foreign company has a previous venture/tieup.

How has this hide-and-seek policy affected the pattern of FDI flows? Mukesh Bhutani of Arthur Anderson says even today 90 per cent of the FDI proposals are cleared by the FIPB. Less than 5 per cent comes through the automatic route.

He balks at the provision which requires a foreign company with a previous venture/tieup to get a NoC from its Indian partner to make fresh investments.

Further, the curbs on acquiring shares in an Indian company for a foreign firm/NRI/OCBs restrict M&A flows. Then, there are anomalies in the RBI and SIA rules.

Vivek Mehra of Pricewaterhouse Coopers says he cannot understand the policy on SSIs. “Why should there be a restrictive FDI policy on SSI items?,” he asks. Perhaps, like many waiting to put their money and trust, he realises there is nothing automatic about foreign investments in India.    


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