Thursday, February 12, 2009

"You need their money, honey"

So long as they were part of the ruling coalition led by Congress party, the Left played spoilsport and scotched every effort to relax FDI norms in specific sectors. They were vociferous against relaxing FDI in retail, telecom and insurance sectors. Now that they were out and recession is in, the government made the best use of the opportunity to throw FDI floodgates open. Now they say equity investments routed through companies in which majority ownership and control is in the hands of Indians would be treated as fully domestic equity.

Till now, the norm was that foreigners would be deemed to have an indirect stake in any investment made by the JV company in proportion to the stake held by them in the JV. In the revised norms, now there is no concept of any indirect holding, so long as the parent JV has a majority Indian holding.

Now, it’s not as if eyebrows aren’t raised.

The principal criticism is that now FDI will be linked to ‘control’ and ‘legal ownership’, completely divorced from “economic ownership”. But I can safely vouch - from my own experience while undertaking due diligence in several JVs that I'd been involved - the fact that FDI norms were easily got around even earlier by inserting specific clauses that vested control with the minority foreign partner, especially in strategic JVs. It just boiled down to who needs who more. If the business needed the strategic expertise that a foreign partner had but the stupid laws don’t let them have control, the majority Indian partners have little or no option to cede `control' discreetly to the minority than not to have access to the expertise at all. Shareholder agreements have vested in the minority foreign shareholder executive authority, super minority provisions to vote against a resolution, demand consent, right of first refusal, etc. Sectoral FDI caps in telecom, insurance and media have given birth to creative holding (thro preference shares / stock warehousing by domestic HNIs on behalf of foreigners) structures. Sometimes even lenders have better rights than majority shareholders in highly leveraged situations.

Laws should certainly regulate, not thwart opportunities. Sooner they realize it the better. But now the economic reality has given our government and its regulators a much clearer vision that they badly needed.

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