Irrational controls

The information and broadcasting (I&B) ministry's decision to stick to the overall cap of 26 per cent for both foreign direct investment (FDI) as well as foreign institutional investors (FII) in the case of news broadcasting companies is retrograde, and more so when other ministries like finance and commerce are in favour of removing the FII limit from the ambit of the 26 per cent ceiling.

By putting a cap of 23 per cent on FII investment, the finance and commerce ministries favour a 49 per cent on over-all foreign holding in the telecom sector.

The main reason why a 26 per cent cap on both FII and FDI was brought in is nothing sacrosanct, and has to do with the company law structure in the country. With equity holding of less than 25 per cent, a shareholder does not have veto right over even special resolutions that require a three-fourths majority.

After 26 per cent, the next important number is 51 per cent since it is at that level of ownership that a majority shareholder gains full control over a company.

So, not allowing FDI and FII investment to rise up to 49 per cent, as the I&B ministry is proposing, does not serve any purpose from the point of view of the government even though that is what is being made out to be the case.

What a 49 per cent equity level does, though, is to allow the foreign partner to pump in fresh capital without breaching government guidelines""it has been seen that in cash-guzzling businesses, a 26 per cent foreign holding cap can very quickly result in a company running out of cash, except of course in cases where the Indian partner has deep enough pockets to be able to match the foreign flows.

The I&B ministry's proposal to restrict FDI and FII holdings to a combined limit of 26 per cent is bad policy for another reason.

Since, in most other "sensitive" sectors such as telecom, the government permits up to 49 per cent foreign holdings, whether through FDI or FII, not allowing the same in the case of the broadcast sector is unfair and vests too much special attention to this one sector.

More important, once the telecom regulator is able to move to a full-blown unified licence in keeping with the overall move towards convergence, as opposed to a unified access one which at present only allows fixed phone line operators to offer mobile services and vice versa, telecom players will be able to offer television services as well.

Is it then the case that unified licence players will have to reduce their combined FDI and FII holdings to 26 per cent, as with today's news broadcast companies? With the government committed to convergence, this clearly cannot be the case.

In which case it looks as if the I&B ministry hasn't really thought through the implications of its stand, and is merely sticking to an outdated stand just because it is too lazy to think afresh.