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The Rush Begins

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[New Routes: Easing of FDI cap will benefit sectors such as telecom Faced with a tight liquidity in critical sectors and Indian promoters’ delicate financial position — as evidenced by their rush to pledge holdings for loans — the central government has opened the floodgates for foreign direct investment (FDI) across most sectors up to a maximum of 99.5 per cent. However, sectors such as atomic energy, lottery, gambling and betting, chit funds, and sectors that haven’t yet been opened to private sector have been excluded. The cap has been kept at about 99.5 per cent because 100 per cent subsidiaries of foreign companies forego tax benefits of combined FDI-foreign institutional investors (FII) investments. Opposition parties, however, may not allow the government to get away with a radical policy change especially when elections are just a few months away. “We will oppose it since Parliament was not consulted,” says D. Raja of CPI. “On 18 February, we are holding a nationwide trade union rally to highlight this.” But if the government can take the decision through, it will help sectors such as ports that failed to attract FDI as well as telecom that had too much of it. The pressure is expected to ease on promoters who, having hit the regulatory cap, were struggling to finance their businesses. Telecom firms such as Reliance Communications and Bharti Airtel could benefit from the change in policy. “It has eased the flow of FDI,” says Arun Maira, senior advisor at Boston Consulting Group. “It would be seen as sensible by companies and FIIs, and attract FDI in sectors such as insurance, telecom and retail in priority.” But analysts think there may not be enough money in foreign markets to flow into India right away. “It will take a few years before FDI will flow in,” says Rajiv Kumar, director and CEO of Indian Council of Research in International Economic Relations. It is not a major decision, but a step in the right direction.” Even the ongoing slowdown in the domestic market may dissuade foreign investors from rushing in with greenbacks. Earlier, Commerce Minister Kamal Nath had warned that India would fall short of its $35-billion FDI target in 2008-09 by about $10 billion. After maintaining robust inflows till September with a monthly range of $2.5 billion to $3 billion, FDI in October slipped to $1.4 billion and further to $1.08 billion in November. But expectations are that companies in telecom, print media and private sector banking can expect quick inflows. However, domestic firms eager for FDI are holding their cards close to their chest. “Let the notification come out, it is still hazy,” says a board member of a telecom company with interests in other infrastructure sectors. An official in the commerce ministry says the new FDI norms will benefit Indian promoters to offload their stake, with least bureaucratic hassles. “Foreign players will get more operational freedom and hence higher investment,” says the official. The government’s move may be an attempt to pep up the economy. But the moot question is whether the government will apply the same parameters to FII, foreign venture capitalists and NRIs. “India had its opportunity to get FDI, but we were haughty about it,” says Ajay Shah, senior economist. “But with the slowdown, that may have evaporated in official circles.” FDI should help Indian companies. Fresh infusion, as Kamal Nath says, “helps achieve a higher level of economic development”. m(dot)rajendran(at)abp(dot)in (Businessworld Issue 17-23 Feb 2009)