India’s Government Paper Proposes Weakening FDI Rules

Article first published as India’s Government Paper Proposes Weakening FDI Rules on Technorati.

FDI-logo The Commerce and Industry Ministry on Friday, released proposals for discussion on whether to abolish foreign investment caps imposed on the companies invested in joint ventures in India prior to the year 2005. The discussion paper released is said to be a part of series of papers released by the ministry as a measure to attract more FDIs. Such papers also inform foreign investors how the Government of India is changing over time the policies and priorities.

Before 2005, there was a rule for the companies who tied up with Indian partners in joint ventures to seek approval from the federal government before bidding for expansion outside the tie-up. The problem is that the policy was reviewed in 2005 after which the rule exempted the companies that invested after 2005 from seeking approval for further expansion of their own. This is clearly observed as discrimination between the companies entered India before and after 2005.

Vedanta’s Acquisition Bid

Maybe the recent bid by Vedanta Resources to acquire Cairn India, a subsidiary of the U.K. based Cairn, prompted the ministry to release the discussion paper. It is a common practice in India that when the government intends a policy review, it would first release discussion papers to identify the opposition so that it can calm them properly. Cairn India has a tie-up with ONGC, a public sector oil exploration company, in its biggest oil well in Rajasthan State. Cairn India holds 70% stake and ONGC the rest in it.

India focused Vedanta Resources made a highest bid for Cairn India of $9.6 billion and sought the government’s approval which is still pending. When the matter came to light there were huge expectations that the ONGC might

exercise its right of first rejection and even make its own bid for Cairn India along with other public sector oil companies Oil India and Indian Oil. Some officials confirmed the idea unofficially but latter some other officials told again unofficially, that there was no such question of bidding for Cairn India as the bid placed by Vedanta was already at high level. The episode occupied headlines of business pages throughout the August.

Plausible Ploy

"The Indian industry today is in a much stronger position than it was in the 1990s, when the condition was first introduced. It, therefore, needs to be seen whether there is a need to continue with the elements of such a regime even today," the paper said. One can understand the government intends to lift the condition in toto. The paper points out that the measure discriminates the foreign investors who had shown confidence in Indian economy much earlier than the new ones that came after 2005. Apparently, it’s a plausible ploy that passes straight away. The FDIs’ inflow in the first half of 2010 decreased by 18% to $10.8 billion from the same period a year ago, a matter of concern for growth-focused and market-friendly Indian Prime minister Dr. Man Mohan Singh.

LPG on Track

The discussion paper released in May 2010 suggested tripling the FDI cap to 74% on production of defense equipment. Two months later in July, the Commerce and Industry Ministry proposed to open up multi-brand retail sector, which prompted political and popular opposition. The ministry’s proposal is stalled from tabling in the parliament due to the upcoming provincial elections in some states. Except election concerns the drive for ‘Liberalization, Privatization and Globalization’ is on full swing in India, though, the global investors are still dissatisfied with the pace.

The real question is whether people are benefitted from these takeovers, acquisitions and tripling of FDIs. In a country where 70% of the 1.2 billion strong population depends solely on agricultural activities, there is no question of M&As and FDI cap removals benefitting working class people.

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