Just as some people appear to undergo near death experience, India seems to undergo near capital convertibility experiences, the latest one being the possibility of dual listing for the shares of Bharti Airtel.
As has been pointed out by this newspaper, listing of shares of Indian companies abroad is not possible in the present financial regulatory structure. Bharti’s shares, if they are listed in South Africa will have to be quoted in the home currency, that is rand.
This is a different situation from that of global depository receipts, which Indian companies use to raise money from markets abroad. The receipts are quoted in stock markets, in dollars and pounds. But those are instruments issued by the banks in those countries against shares issued in Indian rupees by Indian companies.
That intermediary would not be in existence in the case of the proposal put up by Bharti and MTN jointly. The implications of the proposal being rejected by the Indian government will have to be sorted out by the two companies for their eventual merger plans, but the larger issue is one of convertibility.
To their credit, finance ministry officials have said they are, in principle, in favour of letting the dual listing happen. This is in consonance with the position taken by the government to move towards full capital convertibility.
What the government apparently does not favour, is being pushed into a decision because of one such deal. In principle, this is a valid stand.
But there are basically two ways in which governments are often called upon to make a major policy shift. The first of these is a crisis. It was the response to the balance of payments crisis of 1991 that set us off to dismantle the licence-control raj and usher in liberalisation of which we are reaping the rewards. Sure, the government at that time had little room to pull back from taking those decisions.
The other opportunity is when sectors clamour for a change of rules. In 2009, the department of industrial policy changed the FDI guidelines substantially through Press Notes 2, 3 and 4, in response to needs expressed by industry. In tax policy, such changes are of course de rigueur.
The difference now is that all these changes impacted the flow of foreign investment into the country. As India grew as an interesting investment destination for companies abroad the pressure to liberalise the FDI and often the foreign institutional investor rules too grew.
But here is a game changer. As the Bharti deal and before that the Corus deal show, the demand to change rules would now be for outward investments. Changing those rules would mean the government would have to relax the way the rupee flows out of India. Relaxing those rules are essentially the concerns for capital account convertibility also. What is capital account convertibility? It is the ability to conduct transactions of local financial assets (like shares) into foreign financial assets, freely and at prices determined by the markets.
So this means, way before the anticipated time schedule set out in the Tarapore committee on full capital account convertibility (the first stage is expected by 2012), the concerns would be brought to bear upon the government and RBI. Not just Bharti, it is quite certain, other companies would also dog the decision making process on this account.
There are two factors that make this a strong possibility. Current account convertibility rules obviously do not allow a resident Indian to hold shares in foreign currency—distinct from the cash that an individual can hold in foreign currency. For listed companies going abroad for a merger or acquisition, this will be a concern its shareholders will raise for sure. The other concerns the increasing role equity has come to play globally against debt as the means to raise funds abroad, post the global meltdown. Indian companies are being nudged to use this route more often than earlier.
Since equity transfer across national borders is at the heart of the capital account convertibility question, we are obviously getting quite close. Debt can in the ultimate analysis be mediated by the central bank, through creation of suitable vehicles, equity transactions cannot be.
So even if the government does escape the choice this time around, the next poser, one suspects is just around the corner. It may therefore be worthwhile to use the current space to quickly establish the changes that are required to bring the Indian rupee to become convertible on capital account. There are two useful books, that go by the names of Raghuram Rajan committee and the Percy Mistry committee, which have given a nice set of prescriptions for what to do to face up to the new demands from corporate India.