Arbitrariness in FDI

The decision by the Foreign Investment Promotion Board to recommend the approval of 24 per cent foreign holding in an ICICI Bank subsidiary for its insurance and asset management businesses seems to fly in the face of the investment rules laid down. The limit on foreign shareholding in an insurance business is 26 per cent, but since ICICI Bank itself is 74 per cent owned by foreign interests, the effective (or beneficial) non-Indian interest in the insurance business will be way above the permissible limit if additional foreign investment is allowed through the subsidiary. This special dispensation for ICICI Bank is being proposed at a time when several other promoters of Indian insurance firms are patiently waiting for the law to be changed before they bring in fresh capital. Indeed, even if the proposed amendment to the Insurance Act to raise the foreign holding limit to 49 per cent is put through (and nothing is lost if this gets done), the effective foreign holding in ICICI Bank's insurance business will still be way above the new ceiling permitted. It is unfortunate that the government is seeking to permit something by administrative fiat because it cannot change the relevant law at this juncture. It was on firmer ground when it raised the foreign investment limit in the telecommunications sector from 49 to 74 per cent as that did not need changing the law. The logic of that change was to put an end to the pyramiding of holding structures, to recognise what had already happened in the marketplace, and to cap the beneficial interest owned by shareholders; the ICICI Bank decision flies in the opposite direction, creates a new precedent, and therefore a new set of problems.

There is an urgent need to overhaul the entire regime governing foreign direct investment so as to make it simpler and more transparent. Ever since the economic reforms were initiated in 1991, attempts to liberalise the inflow of foreign direct investment via any number of pronouncements and press notes have created a jungle of rules that is difficult to rationalise. The territory has become a happy hunting ground for consultants, lawyers and lobbyists aiding firms to somehow get round the rules. There was no clarity in the choice of sectors in the first place. Things were not made any better through attempts to bring clarity subsequently, and companies have been getting away by issuing hybrid instruments and entering into management control agreements with foreign interests that make a mockery of the nominal shareholding patterns.

While a liberal FDI regime is beneficial in itself, there is an overriding need to make things easier than is the case today. FDI has trebled in the first quarter of the current financial year, to $ 4.9 billion, but steps need to be taken to mitigate the consequences of the drying up of global capital flows in the wake of the current financial crisis. Without this there appears little chance of the country being able to attract the kind of money that came in last year (2006-07), when FDI almost trebled to $15.7 billion. The Indian economy will shine a little less if the pace of foreign investment slows down. Thus the current ad hoc approach, marked by a multiplicity of rules and arbitrary selection of sectors and caps, needs to be given a thorough once-over. But whether a government that is on the verge of losing its majority in the Lok Sabha can think along these lines is the first question to be answered.