5th October – The brick and mortar of ‘FDI 2.0’

Foreign Direct Investment (FDI 1.0) has been welcome in India irrespective of whether or not its equity structure includes Indian public shareholding. The Internet Multinational Companies are characterised essentially by inequitable dynamics, since they distribute most gains to themselves vis-à-vis their host countries. This situation demands a policy response.

The brick and mortar of ‘FDI 2.0’

Objective –

FDI 2.0 should harmonise interests of all stakeholders including Indian consumers, the government and investors. FDI 2.0 could deploy ‘List or Trade in India’ as a strategic policy tool to enable Indian citizens become shareholders in MNCs.

Background –

In 1978, the Indian government adopted a policy that required equity dilution by 100% foreign-owned companies. This led to the ‘Listing of MNCs’, and many of which then provided handsome returns to both MNCs and Indian shareholders. It is estimated now that listing Indian subsidiaries of MNCs alone could add as much as ₹50 lakh crore to equity market capitalisation.

What should India do?

India could implement the following set of proposals –

  1. Proposal 1 (List in India) – Majority (more than 51%) foreign-owned Indian-listed MNCs could be eligible to domestic company tax rate whereas unlisted MNC subsidiaries could be subjected to a higher tax rate. Many countries such as Bangladesh, Vietnam and Thailand have used tax incentives to attract listing by MNCs.
  2. Proposal 2 (‘Trade in India’ i.e. U.S. dollar-denominated parent MNC Shares to be ‘Admitted for Trading’ on Indian bourses] – In this proposal, Indian investors could buy shares of parent MNCs (where global profits and value get consolidated). This can be permitted within the $250,000 Liberalised Remittance Scheme (LRS) limit. Indian bourses could admit only S&P 500 stocks. The Mexican Stock Exchange allows trading of international shares listed in other stock exchanges. India could replicate such models.

Conclusion –

Summing up, increasing Indian equity ownership of MNCs would offer diversification benefits and make Indians more prosperous. Wealth distribution through mutual funds would create a virtuous cycle of innovative ideas, entrepreneurship, employment, consumption, higher taxes, social and physical infrastructure for the benefit of Indian society. MNCs would earn the goodwill of Indian consumers while expanding their investor base. In other words, this is a win-win for all stakeholders.

SourceThe Hindu

QUESTIONIt is said that India’s FDI policy needs a relook in terms of both incentives and regulations. Discuss.