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Opinion: Despite 2013’s flurry of FDI reform 2014 has room for a lot more

Kumar: Preparing for war
Kumar: Preparing for war
JSA partner Lalit Kumar writes that he is pleased with some of the developments coming from India’s regulators to encourage FDI, but much more needs to be done this year if India wants to dream of recovering foreign investor goodwill.

Suddenly there has been flurry of reform and liberalisation measures one after the other, all being hurriedly done to revive investors’ confidence and flow of foreign funds to India Inc, which took a major beating on account of slow pace of reforms coupled with uncertain and faulty policies and regulations.

Attempts are now being made to woo foreign investors. It looks as though reforms are hurriedly announced and with few results expected in the short run, but it is encouraging as long as they are happening.

A solid start

Take for instance, the FDI policy liberalisation for multi brand retail trading allowing foreign investments up to 51 per cent - although it yielded its first result with Tesco’s recent proposal to form a JV with Tata, announced after more than a year of the announcement of liberalisation.

Then there is liberalisation for the telecom sector, which has encouraged Vodafone to increase its stake to 100 per cent in the Indian entity. The FDI cap was liberalised beyond 26 per cent in defence although it is yet to attract foreign interest, the major impediment being the rider of seeking approval from Cabinet Committee on Security on a case by case basis to ensure that the investment will provide access to modern and state of the art technology in the defence sector.

Liberalisation in aviation though has shown some good response with Etihad’s proposed investments in Jet Airways, and Tata’s two joint ventures respectively with Air Asia and Singapore Airlines.

Further, issues such as FDI in B2C e-commerce and railways are already under discussion; the distinction between what constitutes FDI investment and FII investment has also reached an advanced stage; and soon some further clarity and reforms along those lines can be expected.

Securing securities

On the foreign exchange regulations front, the Reserve Bank of India (RBI) too is taking reforms seriously - from its very recent decision to validate foreign investor’s options and other exit rights (although with the harsh conditions attached to it, one wonders if it is really a reform or a roadblock!) to its earlier liberalisation measures such as permitting transfer of shares from resident to non-resident in the financial services sector without having to take a no-objection certificate from RBI or permitting any non-resident (not necessarily a FII, QFI or NRI) to acquire shares under the FDI scheme on a recognised stock exchange in cases where the ‘control’ of the Indian company is acquired in terms of SEBI’s takeover code.

Other welcome reforms include permitting an Indian company to raise foreign funds and listing of ADRs / GDRs without the Indian company having to simultaneously list on Indian bourses; and issue, without RBI’s approval, of non-convertible redeemable preference shares or debentures as bonus shares from general reserves of the company pursuant to scheme of arrangement approved by the court.

SEBI too has validated call and put options from the SCRA’s perspective, which would boost investor sentiments. Discussion papers on REITs and insider trading are being worked on.

Further, SEBI has formulated regulations for foreign portfolio investors to put in place a framework with regard to foreign investors who propose to make portfolio investment in India.

The work on the Ministry of Corporate Affairs’ most favourite project to implement the new Companies Act, 2013, at the earliest is being done on a war footing. It is expected that soon the new law will be in force in entirety.

Where from here?

There have been a lot of reforms announced but there is still room for a lot more.

For instance, we should move to a regime of free pricing for transfer of shares between resident and non-resident i.e. the buyer and seller should be free to decide the transaction price. Then, there shouldn’t be any need to obtain approval from the RBI in cases where deferred consideration is received from foreign acquirer of shares of Indian company, at the least RBI could prescribe that there is no need for approval if the payment is received within a certain permitted time, deferred payments are popular in M&A transactions, so to seek approval in all cases of deferred payment is too much.

Another reform could allow pledging of shares to non-residents without the RBI’s permission, although conditions could be imposed. The end result of any invocation of a pledge in favour of a non-resident is transfer of the pledged shares in favour of the non-resident, so when transfer of shares to non-resident is under automatic route, then why does pledging of shares require RBI approval?

On the FDI front liberalised norms are needed to provide that sale of shares by a foreign owned or controlled company Indian company to another Indian company should not be subject pricing restriction as applicable for a transaction between a resident and a non-resident. It is too taboo for FIPB to take a view that such domestic rupee to rupee transaction will be subject to foreign exchange regulation pricing.

War and peace

This list is long but the moot questions are whether these will be enough to revive investors’ confidence and increase the flow of funds to India. The flow of funds and revival of investors’ confidence wouldn’t happen as hurriedly as was the pace of reforms. It could take some time.

However, we have great expectations in the long run provided the reforms continue, which will ensure more and more certainty to foreign investors and will gradually result in restoring India’s eroded image as it passes through one of its worst phases.

But, perseverance to keep continuing with the reforms at all the time and not only when there is shortage of flow of foreign funds will be the key determinant of success. As it is rightly said ‘Sweat in peace saves blood in war’.

That should be the motto for our law makers, regulators and policy makers when it comes to liberalising our laws for foreign investments.

Lalit Kumar is a partner with J Sagar Associates (JSA). Views are personal.

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