If the policy change is introduced it will further open up scope of foreign direct investment and also will have impact on equity valuation of existing companies. The DIPP has argued that existing companies having up to 49% FDI can have downstream investments which will be considered “domestic companies”. This change in policy was introduced in 2009 through issue of three press notes which were subsequently incorporated in the FDI consolidated policy statement. The idea was that companies which are owned and controlled by resident Indians are for all purposes Indian companies. As a result these downstream companies can operate in sectors where there are sectoral equity caps.

Thus minority foreign shareholding with management vesting with resident Indians should qualify a 49% FDI company entry into restricted sectors. This however is a technical interpretation. There are instances recently of joint ventures where the two sides have explicitly agreed that despite having a minority shareholding (that is, less than 49%) no major decisions could be taken by the board without the presence and concurrence of the FDI representatives on the company board. This has happened in case of some insurance joint ventures. Such arrangements, although very much abiding by the law, in effect violate the spirit of the restriction. Hence, there is reason to revisit the issue in the light of what is happening on the ground.

At any rate, there is no denying the assertion of the DIPP through these changes the scope has already been widened. FDI companies can “indirectly” enter sectors where there are sectoral caps. The department has argued that what can be done indirectly, should as well be allowed to be taken up directly. The department suggested that all equity caps below 49% was meaningless. Going further, through inverted pyramid structure, companies having more than 49% FDI can also enter areas with sectoral equity caps.

If activities of foreign owned firms are to be controlled, this can as well be achieved through departmental control orders, like in case of drugs, through the Drug Price Control Order (DPCO), DIPP has argued. These can address the issue of price or production of drugs in medical emergencies. There is no dearth of control mechanisms in India and therefore the operations of companies – foreign and domestic – could always be influenced keeping in mind public purposes.

There is certainly merit in the argument. As such, it is not as if the world is waiting to come into India and invest. We are only one of the many countries competing for the global investment dollar. Going by the latest count, India is in fact losing out to so many other countries in the investment ranking. According to the World Investment Report 2011, India has slipped from 8th to 14th slot in rankings of FDI flows. Investments into India went down from $36 billion in 2009 to $25 billion in 2010. Malaysia and countries in south east Asia, let alone China, have outstripped India in FDI attractiveness in the current year. They have all received far more investment.

If anything, the ground level hassles in implementing projects are enough deterrents to investors coming in here. Land has proved to be the biggest sore point which has received worldwide publicity. The agitations and violence over land acquisition, ably led by politicians of all sorts, have stalled projects. In fact, this is stopping all capacity expansion in the upstream projects like opening up new mines. We are facing acute shortage of coal and vital minerals. Even if it is understood that India is a heavily populated country and land in India is widely arable as compared to other countries, it is important to resolve this issue to attract more investment.

Thirdly, going by our experience with foreign direct investment since the liberalisation process began twenty years back, it has changed the profile of many industries. Take for instance the automobile sector. It was reserved for the resident Indian investors for a long time. However, once it was opened up to a liberal FDI regime, the technology in Indian automobile industry has improved rapidly. This has changed the quality of cars manufactured in India so much so that a car made here is as good as any other comparable models elsewhere in the world. As a recognition of the international quality and price, Indian cars are now regularly exported.

Foreign direct investment has unlocked the value of Indian companies as well. Only recently, the take-over of generic drug firms in India have revealed the market value of the numerous small niche drug makers in the country. The bigger ones have in the meanwhile attracted astronomical prices for their shares. The completion among investors has also its merits.

There are of course some problems with too fast opening up. If caps are removed at one go, then existing companies can lose value as well. This is because if you allow foreign parent companies to have 100% subsidiaries at one go, their existing companies in which they have minority shareholding become neglected. Hence, the price and market capitalisation of these firms suffer. This hurts most the resident Indian shareholders since they hold the major chunk of equity. It may be recalled that several years earlier when foreign companies to set up fully owned subsidiaries in approved sectors, despite having joint ventures in the same lines of business, it resulted in tanking of the market capitalisation of existing JVs. The celebrated case in this case was that of the American drug firm Pfizer. Pfizer had set up a fully owned subsidiary and Pfizer India suffer total eclipse. This caused substantial losses to resident Indian shareholders. Some safe-guards should thus be retained for protection of shareholders’ interests when liberalising the FDI regime. (IPA Service)