Saturday, October 04, 2008

Law Street in The Economic Times (October-ahem Nov)

Dear Readers,
A slight slip up, perhaps in keeping with the title of this column "Many a slip between the cup and the lip". This column got published on November 4, instead of on the last Friday of the Month, it was slated to appear on October 31.
As they say, it is better late than never. So, here is the link to the online edition of The Economic Times. Zenobia Aunty seriously wonders why we are creating impediments in the flow of funds into India and she means FDI and not FII funds which are often frowened upon and treated as second class citizens. For the benefit of her readers, the column is also cut and pasted below.
Best regards,
Many a slip, between the cup and the lip
- Simplicity is the key to good governance
- More approvals need not mean good governance
- Clarity is urgently required in the FDI context

Reading the news about financial giants in the US come tumbling down, Zenobia Aunty’s mind wandered over to the stories written by one of her many favourite authors – Ruskin Bond. No, this Bond is not the one with the 007 tag attached, but rather an author who writes eloquently and simply about human life, with a few ghosts thrown in here and there.
In his story, “The boy who broke the bank”, the author captures life in a small town and how a chance remark by a poor village boy, precipitated a crisis with a long queue to withdraw money from the local bank.
However, the current crisis is not a fall out of a chance remark. Many ascribe it to greed. All said and done, Zenobia Aunty is quite perplexed. The bail out entails purchase of bad debts held by the financial institutions because they lent money to people who could not repay, or equally bad, purchased loans from institutions who lent money to people who could not repay. She is so glad, that her tax money will not be used for this, but her US based friends are certainly not smiling. Unfortunately, in this flat world, the trickle down effect will be felt even in Bangalore or Chennai or anywhere else.
There are lots of things which Zenobia Aunty does not understand, apart from the reasons why these giants tumbled. Take our very own Foreign Direct Investment (FDI) Policy, for instance.
The Economic Times, which is Zenobia Aunt’s favourite financial paper, has reported that the government is now planning to rework the FDI policy for holding companies. Joint venture companies with foreign equity are required to seek fresh approval from the Foreign Investment Promotion Board (FIPB) within 90 days while investing in downstream companies.
According to the stand taken by the FIPB in recent times, once an Indian operating company (having an FDI stake), makes an downstream investment, it changes its stake from an ‘operating company’ to that of an ‘operating cum holding company’ and FIPB approval is mandated. Even if such downstream investment has been made in the past approval is now required.
A plain reading of a Press Note, which had sought to simplify the issue, makes Zenobia Aunty; literally tear her unruly silver hair out. This Press Note had clearly stated that foreign owned Indian holding companies can undertake downstream investments in activities falling under the automatic route – without FIPB approval, subject to certain conditions. So what now?
Mind you, this isn’t a case of purchase of bad debts of the entity in which the downstream investment is being made. It is pure investments into India, required for further growth and development of the economy. It is money coming in, not going out (something which some belonging to the class of ‘powers that be’ still frown upon, India’s pride on foreign acquisition of mega companies notwithstanding).
To add insult to injury, even a marginal foreign holding in a company which makes a downstream investment can trigger a strong reaction from the FIPB. Shouldn’t the FIPB define the percentage of FDI in the primary operating company which is set to make further downstream investments, as the trigger for seeking approval? Can’t this be restricted to say a FDI percentage of 75 per cent or more? Further what exactly constitutes downstream investments? Would it cover non-equity?
Do you remember Chris? Zenobia Aunty’s globe trotting expat neighbour? He is all set to quit and take a long break in Bali. Lucky guy. He swears he will take up another profession, probably teaching people how to scuba dive. Sharks according to him, are safer than ambiguous legislations. Spot, while conjuring up dreams of shark fin soup (something he saw on telly) wags his tail in approval.
Chris’ employer company thought he was now an ‘India champ’ and could take on anything and everything, including the Bangalore traffic! However, he could not handle any more scenarios, where one thing is intended and another implemented. Apart from this issue, which has led to him sleepwalking in the neighbourhood (only Spot enjoys these post midnight journeys over potholes and slush) Chris is irked that a 100 per cent tax holiday was intended for SEZ units, but hang on - thanks to a tiny formulae, this actually gets reduced, if one goes by the literal interpretation and the company has both SEZ and STPI units and other business units. A similar situation in another section of the Income tax Act was favourably resolved, this pertaining to SEZ’s remains pending, till this date.
There is many a slip between the cup and the lip. Just paying lip service, to the cause of foreign investments or the SEZ sector doesn’t’ help in the long run.


Yoli said...

Yes, economic times are rough on everyone. Lubna, thank you for stopping by my blog and for your interesting and funny post.

Hope all is well with you and your Mom.

Gulshan Bamboat said...

Have, for several years, enjoyed your column in the ET whenever it's been within the range of this simple home-maker. (First time to your blogs, though). Am especially tickled about Zenobia Aunty -- have a favourite maasi so-named too. Hope your Ma is better now.
Warm regards,

Lubna said...

Dear Gulshan
THank you so much for visiting the blog and for your kind comments. You made our day. It is Zenobia Aunty's happiest day, what with Obama winning and your post. I just could not figure out how to leave a comment on your blog, hence hoping you see this message.
Best wishes
Lubna and Zenobia Aunty

Gulshan said...

Thanks. (I guess one has to be a member of Y!360 to be able to comment.)
And how is your Ma?