Editorial: When 26% equals 49%

Jun 07 2014, 00:58 IST
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SummaryMost FDI limits such as the 26% one make little sense

Now that the government is reviewing FDI caps in sectors like defence and insurance, the question is whether they will be raised to 49%, 51%, 74%, or all the way to 100%. While various lobbies are in favour of restricting foreign ownership to under 51%, so that Indians can control the venture, one version doing the rounds is to allow FDI till 49% but cap the voting share at 26%. Every sovereign is within its rights to fix FDI limits, but what is not clear is the purpose that is sought to be achieved. The 26% limit derives its relevance from the law which allows someone with a 26% stake to prevent passing of special resolutions like, say, buying back shares or entering a completely new area of businessapart from ordinary resolutions like passing of accounts, approving dividend levels and appointing directors, anything outside the course of the every day business is special. But since there is no additional power that an investor gets till he hits the 51% levelthats when he gets controlwhy not do away with the 26% and move to 49% straight away? Similarly, when 51% is allowed, why not just move to 74%assuming that, for some reason, you want an Indian shareholder to have a 26% stake to prevent the foreigner from passing a special resolutionsince the investor gets no additional powers, but can at least infuse more capital.

The experience of the past shows that such controls have served little purpose except to provide an entry point for Indian entrepreneurs to make a small fortune with the foreign investor mandated to have a nameplate local investor. That is why, when Vodafone needed an Indian partner, Ajay Piramal invested for two yearstill the law allowed 100% FDIand walked away with a cool 52% return. Since the telco operated in India and was subject to all local laws, on interception of calls for instance, it is not clear what purpose was served by mandating an Indian partnerindeed, if there was a purpose served by having Indian shareholding at 26%, what changed to allow this to be diluted? So whether the government fixes the FDI level at 49% or 51% or 74%, it would be important for it to justify why the other options were not chosen. What is it about an insurance JV that makes it safer with FDI levels of under-51%is there a fear it will not

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