31-05-2012, 02:32 PM
FDI POLICY-RATIONALE AND RELEVANCE OF CAPS
FDI POLICY-RATIONALE AND RELEVANCE OF CAPS.pdf (Size: 466.65 KB / Downloads: 126)
Invitation of Views
1. As part of its inclusive approach to the formulation of various policies, this Department has been engaging in prior public consultations on important issues on which policy reform is contemplated. These structured discussions are triggered by the publication of Discussion Papers (DPs) outlining such issues. The Department has, so far, published eight discussion papers, of which five have a direct nexus with FDI policy. Of these five, policy action has been completed in respect of three DPs and is ongoing in respect of two DPs.
2. This is the ninth Discussion Paper in the consultation series. Views and suggestions are specifically invited on Section VIII of the paper entitled ‘Issues for Consideration’ and any related issues by 15th July, 2011. The objective is to examine whether some elements of FDI policy need to be reviewed. It is requested that facts, figures and empirical evidence may be furnished, in the context of the specific observations/suggestions made.
3. The views expressed in this discussion paper should not be construed as the views of the Government of India. The Department hopes to generate informed discussion on the subject, so as to enable the Government to take an appropriate policy decision at the appropriate time.
4. The evolution of FDI policy in India has broadly gone through four phases1.
5. The first phase, between 1948 and 1969, was characterised by a cautious welcome to foreign investment, as outlined in the Industrial Policy Statement of 1948, which observed that the ‘participation of foreign capital and enterprise will be of value to the rapid industrialisation of the country.’ It, however, noted that ‘the conditions under which it may participate be carefully regulated in the national interest. As a rule, majority interest in the ownership and effective control should always be in Indian hands.’ During this phase, foreign firms were encouraged to invest in protected industries, such as fertilisers and machine tools and extensive concessions and tax advantages were offered to attract multinational oil companies.
6. The second phase, between 1969 and 1991, was marked by the coming into force of the Monopolies and Restrictive Trade Practices Commission (MRTP) in 1969, which imposed restrictions on the size of operations, pricing of products and services of foreign companies. The Foreign Exchange Regulation Act (FERA), enacted in 1973, limited the extent of foreign equity to 40%, though this limit could be raised to 74% for technology-intensive, export-intensive, and core-sector industries. A selective licensing regime was instituted for technology transfer and royalty payments and applicants were subjected to export obligations. The year 1977 witnessed a reversal of the policy, when Coca Cola was asked to move out of the country.
RATIONALE OF EQUITY CAPS
14. The FDI equity caps in a sector essentially reflect the levels of control that a foreign direct Investor is permitted to exercise in a company operating within that sector. The FDI policy incorporates equity caps at broadly four levels- 26%, 49%, 51% and 74%2. These caps reflect the ownership/ control levels in a company, under the Companies Act, 1956. Thus, for example, any equity holding greater than 25% gives a right to block a ‘special resolution’. 49% equity represents a level just short of ownership. 51% signifies ownership and a right to pass all ordinary resolutions. 74% equity cap on FDI means that the Indian equity holders, acting in unison, can block a special resolution.