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Column: Take FDI norms beyond symbolism

More than the investment routes, foreign investors look for a consistent and single-window clearance system

The change in government has created a buzz in the economy with major reforms announced or believed to be in the pipeline. All this has set a positive mood for foreign investors. Such investors, who were sitting on the side-lines and waiting for a stable government in India for long, are now willing to invest provided a conducive environment is created. It is high time that the new government assessed the situation and brought about more investor-friendly steps that showcase India as a mature economy to the world. The Budget announcements liberalising sectors like defence manufacturing, insurance, construction; the clarification on e-commerce for manufacturing entities; and the easing of conditions related to warrants and partly-paid shares?all are welcome steps in this regard. The issue of a list of defence items requiring industrial licence, phasing out the redundant NIC 1987 coding system and increasing the validity period of the industrial licence government signals how eager India is to improve its ?ease of doing business? rating.

Allowing FDI in certain parts of the railways sector is a symptom of breaking long-standing barriers and realising the need for achieving cost breakeven in public sectors as well. But the question that needs answering is whether opening up of a few sectors or the symbolic increase in foreign investment limits can provide sufficient boost to the economy. Or are there still some hurdles to jump? The insurance sector is an example of where liberalisation announcements have been made without making parallel amendments in the existing law, the Insurance Act. This creates redundancies and confuses the potential investors.

Foreign investors have to deal with certain long-pending issues like simplification of the approval system, clarity and consistency of policy, retrospective taxation, restrictive labour laws, weak IPR environment, etc. The government has been able to address most of these issues but certain sectoral issues linger acting as a hindrance to foreign investment. The investor appreciates the liberalisation in the FDI policy but requires a more transparent, predictable and comprehensive investment regime. The government seems duly concerned in this regard, given how the Mayaram committee report on liberalisation of FDI policy was a step taken to remedy this.

India must realise that foreign investors are not concerned about investment routes in a sector nor are their business decisions dependent on it. The demand of the global business community has always been for a predictable and consistent stand on most issues and a single-window clearance system. A sector like construction and development, which was opened up in 2005, lacks consistency in the policy that governs it and is plagued by many issues that make it difficult for foreign investors to understand the permitted structures. The move to allow limited liability partnerships (LLP) to be considered business entities was cheered by the foreign investors as LLP is seen as an alternative corporate business vehicle that allows its members the flexibility of organising their internal structure as a partnership based on a mutually arrived agreement. But not allowing a foreign corporate to appoint a designated partner (DP) has slammed the brakes for various foreign investors who wanted to access this route. It is difficult to understand how a LLP is expected to invest up to 100% if it cannot appoint a DP.

There are certain sectors where there is the requirement of dual approval. In such sectors, the condition necessitating approval from FIPB should be done away with as the sectoral regulator undertakes a deep scrutiny of proposals. There is a dire need for having a single regulator constituted under an Act of Parliament on the lines of bodies like Sebi, Irda and Trai and mandating a specific time-frame for clearance of each proposal.

There was a lot of opposition at the time of opening up of multibrand retail but, since then, this sector has been devoid of any investment in spite of easing norms. It also needs to be seen that allowing investment up to 49% in defence manufacturing does not change the dynamics of the sector as earlier investment up to 100% was allowed, subject to clearance by the Cabinet Committee on Security. There is a need to promote these sectors with a pragmatic view on opening up. As in multibrand retail, if a sector is opened up with restrictive conditions attached, it is not attractive to the foreign investor. Giving the right to the states to choose if they want the foreign investor to set up shop in their jurisdiction only confuses the investor, as with change in government, the business plan could go for a toss. The sectors which have multiplier effect on investment, employment, supply chain, etc, need to be promoted by generating confidence of the foreign investors for investment in these.

The new government?s steps towards increasing its use of social media also depict the gradual shift to the digital medium of communication and business. The e-commerce scene in India suggests a shift in the purchasing pattern of the consumers is occurring, given that buyers are ready to move to the digital world. This shift can also be attributed to opening up of the telecom sector which has democratised the internet. The government needs to learn from the telecom investment scene and remove hassles for e-commerce. The current policy bars foreign investment in e-commerce in any form but the presence of certain structures creates uncertainty which needs to be addressed.

To conclude, the government needs to make policy more predictable, transparent and maintain consistency. While opening up sectors the practical aspects needs to be evaluated and a liberal view must be taken while framing the policy. The government needs to realise that liberalisation announcements should not be mere symbolism and proper implementation should make India a hub for foreign investment. There is a need to assess sector- and area-wise FDI trends on a quarterly basis and bring about measures to boost regional as well as sectoral investments.

The author is executive director, Tax & Regulatory Services, EY.

Views are personal

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First published on: 13-08-2014 at 00:33 IST
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