New Delhi: Industry Ministry's proposal to do away with foreign direct investment caps below 49 per cent in all sectors will bring clarity in the FDI policy regime, besides encouraging investments, say experts.

Making a case for removal of FDI caps below 49 per cent, the Department of Industrial Policy and Promotion (DIPP) has said in a discussion paper that the limits provide opportunity for arbitrage to unscrupulous Indian partners at the cost of consumers.     

"These FDI limits are artificial and often breached through complex web of subsidiaries. We had enough experience of FDI in the country. Time has come to open most of the sectors specially multi-brand retail and defence," said Diljeet Titus, senior partner of law firm Titus & Co.

Moreover, he added, "From the legal point of view, it doesn't matter whether the equity holding is 26 per cent or 49 per cent. In both cases, the investor will exercise the same
control."

Expressing similar opinion, JNU Professor and expert on overseas investments Manoj Pant said these sectoral caps are meaningless and do not prevent foreign companies from entering the Indian market.

"Sectoral caps on FDI do not work at all. You can't prevent cross-holding. There should be a clear policy. The caps do not serve any purpose, instead you lose lot of money," Pant said.

As per the current norms, a downstream investment by a joint venture firm with minority foreign equity and majority Indian equity, is not considered as FDI and the DIPP paper said, "this effectively opens all sectors to 49 per cent FDI indirectly, raising a question mark on the relevance of sectoral caps".

Hence, "it is logical to argue that 'what can be done indirectly, should as well be allowed to be done directly'. Therefore, there is a clear case of abolishing all caps below 49 per cent," it said.

Commenting on this, KPMG Executive Director Krishan Malhotra said if indirect investment up to 49 per cent can be made under the present norms in any sector (as pointed out in the paper), then the question raised by the industry ministry in its discussion paper is valid.

"Accordingly, direct investment up to 49 per cent should be allowed in all the sectors like multi-brand retail," Malhotra said.

A government official too said that: "This discussion paper is an invitation for foreign investors to start investing in sectors like defence, multi-brand retail, media and aviation.


(Agencies)