One particular journalistic cliché one always read on the sports pages in the ‘80s was: “India manages to snatch defeat from the jaws of victory.” Then, it used to be about our cricket team’s fortunes against Pakistan in Sharjah. Today, it would aptly fit the performance of our economic and regulatory policy, its authors and administrators.
Until recently, our policymakers took pride in how India was not hurt when the western world reeled under a financial crisis through most of the last decade. They took pride in having ensured that we did not trip, fall and get hurt on the premise that they had never truly let us run. Yet, today, the Indian Rupee is at all-time low. Industrial production in October is reported to have its sharpest fall in two years.
Ironically, the government in power is a re-elected one, but has lost the will to govern. It is ironically headed by the man who authored opening up India under the political patronage of a different Prime Minister. Rather than being an oasis in the arid world economy, India has been fast moving to a quagmire for foreign investments for a while now.
Foreign direct investment (FDI) into India in 2010 was a lower by a third than in 2009. Too smug in their belief that “capital now needs India more than India needs capital”, our policymakers have lived in denial mode.
The FDI policy framework entails four different agencies, and each can work in a silo impervious to the thinking in the other two. The first is the Reserve Bank of India (RBI), India’s central bank, which administers exchange controls under the only real “law” on the subject – the Foreign Exchange Management Act (FEMA). The RBI makes subordinate legislation in the form of regulations under FEMA, which should govern cross-border investments in and out of India.
Yet, on a number of issues, the positions adopted by the RBI on day-to-day matters of exchange controls goes way beyond the basic scheme and purpose of exchange controls. For example, a transfer of Indian shares between two non-residents that has no bearing on the balance of payments is inexplicably considered prohibited in certain circumstances. A cross-border pledge of shares is considered prohibited although a full transfer of shares is permitted subject only to certain conditions. Worse, even non-repatriable funds of non-resident Indians, earned and kept perpetually in India, are treated in foreign funds merely because a non-resident Indian owns them.
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The second is the Department of Industrial Policy and Promotion (DIPP), which is housed in the Commerce Ministry, and writes an “FDI policy” document every year. The FDI policy document on sectoral caps on FDI was made a schedule to FEMA regulations in 2000. Thereafter, the FDI policy document and the FEMA regulations have never entirely been in sync. The DIPP often experiments with concepts and ideas to improvise on policy to be seen as smart, but sadly the cure is often more painful than the ailment. The latest nugget from the DIPP was a blanket treatment of all equity investments involving put and call options as debt, only to be forced to reverse it within weeks. The stance of FDI policy on foreign investment in equity warrants has been “under review” for ages and is now a permanent footnote to the FDI policy document.
The third is the Foreign Investment Promotion Board (FIPB), a loosely-organized “single-window” clearance shop, housed in the Department of Economic Affairs (DEA) of the Finance Ministry. The FIPB considers applications for approval of FDI – the basis of refusing approval or the principles of according approval are conspicuous by their absence. Inexplicably, investment proposals of above a certain size (currently, Rs 1,200 crores) need a further endorsement by the Cabinet Committee on Economic Affairs (CCEA), a committee of ministers, who do not have any specific schedule to meet for considering FDI proposals, and are none the wiser to approve an investment.
The RBI does not bother amending FEMA regulations when it introduces change. It leads life through circulars. The number of inconsistencies between the regulations and circulars is large. None of the policy made by the DIPP, the processes of the FIPB, or by the CCEA has any statutory basis. These agencies can also adopt inexplicable positions. For example, when Daiichi acquired Ranbaxy, the FIPB mandated that the transaction should be executed only on the floor of the stock exchange (a move that would have saved the sellers a huge amount of capital gains tax). The Securities and Exchange Board of India (SEBI) had to assert that the FIPB had no jurisdiction to disturb price filter limits applicable on stock exchanges.
Portfolio investments from foreign institutional investors are informally considered dubious and feared as a conduit of resident Indian money stashed abroad coming into India, resulting in an unreasoned unstated unwelcome signal. It is only a matter of time that this source of foreign capital too would dry up. Little wonder the Indian Rupee is today valued the way it is.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.) somasekhar@jsalaw.com