Tuesday, March 15, 2011

FOREIGN DIRECT INVESTMENT


POLICY AND ITS IMPLEMENTATION REQUIRING SERIOUS REVIEW

The Government of India has rightly opened, a few years ago, the Foreign Direct Investment in various sectors under automatic route, where investment up to 100% by foreigner/ non resident is freely permitted. There are certain sectors in which sectoral caps are prescribed. There are certain
other sectors where investment is prohibited such as agriculture, real estate business etc.In certain sensitive sectors there are additional conditions prescribed. It is important that the Government can consider its policy as well as implementation especially in certain specific sensitive sectors where the Indian sovereign intention is not adequately respected in letter and spirit by certain section of foreign

investors as well as resident Indians.

FDI in Retail Sector

FDI in retail sector is strictly prohibited except under single brand, where up to 26% equity is permitted by specific government approval. It has been noted that pressure is being built up on the government to open up the retail trading sector to foreign investment under the garb of sophisticated technology and benefits to consumer. In reality, opening up of FDI in retail is completely against national interest as not only it will kill self-employment of about 200 Lakh Indian residents but
will also act against interest of the consumers by increased costs. FDI will also increase dependence on packaged goods as compared to traditional fresh and low cost distribution mechanism, very effectively working in India.
Certain segments of international investors, in connivance with local citizens, have already started defeating the prohibition of FDI in retail by misusing wholesale and cash and carry route, permitting sales to anybody who is holding a VAT Registration. Some of them are simultaneously developing retail chains on the front in the name of the Indian owners whereas the international counterparts are not only operating cash and carry/ wholesale but also the complete management of the retail is being monitored by the foreign company and the foreign nationals. It is important for the government to ensure that any informal or formal understanding against the letter and spirit of the law of the land has to be handled very strictly and smartly. Also the foreign investment in wholesale cash and carry
segment need prohibition as there is no need to permit foreign investment even in wholesale sector or in cash and carry sector. The only thing which can be permitted is sales of business to business in hi-tech products and not in retail consumer products.

Investment in Real Estate

The government has clearly prohibited investment in real estate business and has only permitted investment in developmental projects by foreigners or by non resident Indians. Investment in agriculture land and farm houses is specifically prohibited. However, it has been observed that these rules are being defeated and / or flouted by a large number of non resident Indians or persons of Indian origin. In some specific cases even foreigners and foreign companies have acquired large
chunk of land in various parts of the country in the garb of intention to implement investment in permitted sectors in terms of FDI Regulations or by misinterpreting liberal investments in real estate permitted to NRIs or PIOs. The government may reconsider its policy of real estate investment by foreigners and foreign companies as well as NRIs and PIOs. The real estate in India is becoming
costly and is going beyond the means of the common man. India has crores of people who do not have their own house or even an appropriate residential accommodation. After the announcement of opening of the real estate to international investment, the real estate prices have multiplied by about 20 times. Are we not suffocating resident Indians immensely and facilitating unwarranted profiteering for the foreigners/non residents.

Indirect Investment

The various press notes issued by Government of India in the year 2010 have freely permitted indirect investment by the companies who have more than majority ownership and control of resident Indians. This has indirectly permitted minority holding and minority control in the hands of non resident Indians or foreigners and foreign companies. In a large number of cases side letters, memorandum of understanding, pledge agreement, financing agreement and various other structured financial products are used to directly or indirectly control the affairs/cash flow and profitability of the Indian entities by the minority ownership and / or funding institutions. It is very necessary to issue very clear-cut guidelines not only declaring all such arrangements as illegal but also prescribing disclosure of all such agreements, in a confidential manner to a group of experts working in RBI to ensure that the FDI guidelines are followed both in letter as well as in spirit.


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