"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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After thoughts governments

Placing a fielder after the ball gets struck

This is my favorite cricket metaphor. It typifies a late riser, usually a fielding team captain that moves around his fielders to spots after the ball gets hit and not before. Smart batsmen will sense this and occasionally mislead the fielding team by offering unorthodox strokes to spots where they are not so good at stroking (say, a right hand batsman playing a risky shot to the gully or extra cover on the off-side) – it’s just a ruse to rattle the field so that he can freely score at his favorite spots where there shall be no fielders. Smart captains normally set a field and make sure his bowlers bowl to the field, not letting the batsmen settle down.

Our administrators are of the former variety - of late risers. When our real estate market was red hot, global strategic and financial investors including PE were making the major mistake of investing large amounts of money in overvalued assets, our government came down with a slew of regulations – P-Note bans, setting high water marks for FDI, classifying convertible debentures as equity etc. They made sure that they punctured the swell until there was nothing but flat tires. Now after the investors are gone, the globe in a recession, real estate developers are broke, sense prevails.

The government is tweaking FDI regulations to exempt mixed development projects from the $10 million capitalization requirement, reduce the project size to 10 acres (from 25 acres) and cut the minimum built up area to 10,000 (from 50,000) square feet. The lock-in of three years after the date of completion of the project shall continue. The only condition is that 50% of the area will be kept open for hotels / tourism activities, shall be subject authority supervision and residential buildings shall not be put to use otherwise.

It was pretty much the same thing that RE developers earlier clamored for. Now after they are long broke or even dead and gone, the government is waking up to the idea. Anyway, I will stock up on some real estate stocks - expecting a rally :-)

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FDI phobia

The machinations for circumventing the 26% FDI limits in Insurance sector has taken a new turn with ICICI Bank’s proposal to transfer its 74% holdings in its insurance ventures to a holding company, ICICI Financial Services Ltd.

ICICI Bank owns 74 per cent each of ICICI Prudential Life Insurance and ICICI Lombard General Insurance, but the bank is 70.88 per cent owned by foreign investors. This means the effective Indian shareholding in the insurance subsidiaries is only about 21.54 per cent, against the FDI norm of 74 per cent Indian ownership.

If ICICI Bank transfers its stake in the insurance companies to the holding company and if that in turn sells a 24 per cent stake to foreign investors, then the effective Indian shareholding in the both the insurance companies will further fall to about 15.62 per cent.

While Finance Ministry has approved this back door hike in FDI ceilings, FIPB and RBI are not so sanguine about it.

I go that when color of money is increasingly losing its relevance in a globalized world, why should there be any ceilings at all? Be it Indian or Foreign Investor, so long as they are subject to TRAI & RBI regulations, there should be no problem. In fact FDI in insurance should be freely allowed since it covers risk and entry of a foreign investor enables cross-border distribution of that risk. Restriction stimulates the temptation to get around it by devising ingenious ways such as the holding company route, which on the surface is appearing rather innocuous. Or may be it is.

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Not so soon, Mr.Sarin...

No matter how hard CNBC anchors may try to glorify businessmen, big business everywhere has its murky side. Arun Sarin of Vodafone had this rant at a Global IIT conference in San Francisco. Sarin while calling for more transparency in acquisitions was referring to some of his rival bidders - in $ 11 bn HutchEssar deal which vodafone had won - aiming to scuttle the deal using their political clout.

In May, Vodafone completed the acquisition of controlling stake in India’s Hutch-Essar from Hong Kong-based Hutchison Telecom International Ltd (HTIL). Indian regulations impose a cap of 74% for Foreign Direct Investment (FDI) in Telecom sector. There’s some confusion on the `Indianness' of a 15% slice held by HTIL’s partners and if upheld, would add up the foreign holding for Vodafone and Essar to 89 per cent – that is, violating the FDI cap.
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So get less vocal, Mr.Sarin….you aren’t completely out of the woods as yet...rivals could still be out there…