From Business World of 24 January 2005.
Foreign
investment
The policy on foreign investment was a
2X2 matrix. There were priority industries, and others; and there was foreign
investment below 40 per cent and above. In priority industries, all foreign
investment required government permission; in non-priority industries, it
required permission only if it exceeded 40 per cent, the rest being with the
promoter, government financial institutions or the public. In any case, control
had to be in Indian hands. Not only were foreign subsidiaries not allowed, but
the Foreign Exchange Regulation Act of 1973 tried to make their parents sell
them off to Indians. The policy, in short, was “Indians in the saddle”.
In 1991, an
inconsistency developed between the serious balance of payments crisis and a
policy of keeping out foreign investment. So a number of policy changes were
made. First, industrial licensing was abolished; investment required permission
only six strategic industries. That implied that foreign investment policy
could no longer be an offshoot of industrial licensing, but had to be
separately formulated. The magic figure of 40 per cent was replaced by three –
26, 49 and 74 per cent; these three were set as limits of foreign investment.
The idea was that at 26 per cent the foreign partner would get a seat on the
board of directors, at 49 per cent the Indian partner would be in the driving
seat, and at 74 per cent the Indian would get a place on the board.
The government
did not prohibit foreign investment over the prescribed limits. It said that
anyone who wanted to exceed the limits had to get the permission, not of the
Directorate General of Technical Development in the Ministry of Industry as
before, but of the Foreign Investment Promotion Board. This board was located
in the Prime Minister’s Office and headed by the inimitable Principal Private Secretary Amar Nath
Varma, and consisted of secretaries of the relevant ministries. It always took
decisions within three weeks of submission of an application; and unless there
were good grounds, it allowed higher percentages of foreign stake. It allowed
the foreign companies whom FERA had deprived of majority in their subsidiaries
to resume majority; and in general, its attitude towards foreign investment was
positive. It did much to attenuate the prejudice abroad against India.
There were
powerful Indian industrialists then who were very protective of monopoly
positions they had built up under controls, and who abominated the idea of
foreigners coming and upsetting their apple cart. Could there be a way of attracting
foreign investment without rousing their fears and inviting their wrath? One
was found: foreign portfolio investment was allowed up to 20 per cent of a
company’s equity, as long as no single foreign entity owned more than 5 per
cent.
The BJP made three
changes to this policy framework it inherited. First, it played around with the
investment limits of 26, 49 and 74 per cent. It thus gave a signal that it was
open to deals, which no doubt benefited it as well as those who asked for
changes in limits. Second, it gave Indian industrialists a perpetual veto on
investment in other ventures by their foreign ex-partners; that was the
notorious Press Note 18. Finally, it relaxed the portfolio investment policy:
Indian companies could decide for themselves up to what proportion they wanted
to allow foreign portfolio investment.
This
discretionary and pro-promoter regime brought considerable prosperity to the
BJP; money was one thing it was not short of in the general election last year.
And it went far to remove the Indian promoters’ fear of foreign competitors’
entry into India. But the BJP did one more thing. It made share buyback by
companies legitimate. The result was that promoters could use the reserves of
companies to consolidate their control over the companies. And since foreign
portfolio investors are permitted to invest on the condition that they do not
influence the management of the company, promoters of most major companies have
become immune to shareholder influence. In other words, the management of
Indian companies is not contestable; the only way the management can change is
if the promoter decides to sell out.
Thus the BJP, in
its effort to protect the Indian industrialist against foreign competitors,
unwittingly made the Indian shareholder hostage to the promoter. If the
promoter is competent, he will serve the shareholder well. If he is old, or
stupid, or is quarrelling with his brother, he will serve the shareholder ill.
Is it any surprise that the Indian shareholder is not investing in Indian
companies?
