DPIIT, Finance Ministry locked horns before tweak in FDI guidelines

The government’s move on Friday, mandating government approvals regarding foreign direct investments (FDIs) “to curb opportunistic takeovers /acquisitions of Indian companies”, went through the Cabinet unanimously, but only after a fair amount of backroom work.  

There were differences between the department for promotion of industry and internal trade (DPIIT), which had moved the Cabinet note, and the finance ministry. Because of the differences, senior ministers, including the ministry of external affairs, had taken part in deliberations before the Cabinet gave its approval.

Since the FDI notification was meant to restrict, than expand, the ambit of foreign investment, it was initially opposed by the finance ministry. The latter argued that at a time when there has been a record withdrawal of foreign investment from the Indian capital markets, a restriction would be read otherwise. 

Overseas investors have pulled out more than Rs 1 trillion from the Indian markets (Rs 56,247.53 crore from equities and Rs 52,449.48 crore from the debt market) between March 2 and March 20, according to data from the depositories. It also argued that the government was trying to expand Indian presence in global market indices and that process could be hampered with such restrictions. 

The apparent trigger for the action was that last week the People’s Bank of China (PBC) raised its stake in HDFC to 1.01 per cent from the 0.8 per cent it held in March. However, a finance ministry source said within the year, PBC had already raised its stake even further. As of September 2019, it held 0.97 per cent in HDFC and, hence, the move to raise it to 1.01 per cent was insignificant.  But DPIIT argued it was only instituting a system where the government would be in the know of any such move, in advance. 

“We have not prohibited anything. There are several sectors like banking, insurance, and telecom where there is a need for approval. This restriction should be seen similarly,” said a top government source. The source also acknowledged that it had held consultations with several agencies before steering the note. 

DPIIT also claimed that as the restriction was upfront linked to the disruption caused due to Covid-19, there would be no negative interpretation from overseas investors. “This is the reason we made a reference to Covid-19 in the notification,” the source said. “The government will be in the loop, whenever such investments are made from now on.”