The Hindu Business Line : Raising the FDI limits

THE FURTHER LIBERALISATION of overseas ownership limits in banking and petroleum sectors should occasion no surprise as such initiatives had been on the cards for quite some time now. For instance, even at the time presentation of the 2002 Budget, the Finance Minister had spoken of keeping a 49 per cent ceiling (of equity) on portfolio investments by overseas investors over and above the sectoral limit of a similar percentage for direct investment in banks. That would have effectively allowed a 98 per cent control for overseas interests. It is another matter that in the absence of follow-up at the operational level the ceiling remained at 49 per cent. Hopefully, the regulatory confusion will now endwith the formal announcement that the revised norm of 74 per cent would include portfolio investments as well.

An immediate consequence of the latest proposal would be a spurt in takeover interest. Foreign interests will be eyeing some of the domestically owned and listed private banks to help them rapidly ramp up their operations in a market that is increasingly seen as rivalling China's. But it is difficult to see any great enthusiasm for fresh investments in the petroleum sector as retail marketing here on a greenfield basis is a tough challenge that even international oil majors would hesitate to take on. They might show greater interest if any of the public sector undertakings is privatised. But the Government is committed to keeping the cap on foreign ownership at 26 per cent for fear of losing majority control in what is being seen as a strategic sector.

But the fresh dose of liberalisation notwithstanding, the present policy on ownership controls in different sectors and within each the types of businesses, still bristles with contradictions. Nowhere is this more glaring than the banking industry. Controls on ownership structure co-exist with total freedom to foreign interests in the case of incumbent enterprises. As a matter of fact, exclusive foreign entities control nearly 10 per cent of the total assets in the banking industry. If foreign ownership is not in national interest then it defies comprehension that some of them should be allowed to not only carry on their business but even grow. But if they pose no such threat then shutting the door on some merely because they were not in when the door was shut the first time, even as incumbent enterprises enjoy total freedom from ownership restrictions, is an example of perverse protection for the latter which serves little public purpose.

Of course, the total dismantling of ownership controls and branch licensing restrictions is bound to happen, if only because the West wills it so. The discussions under the WTO framework for an agreement on trade in services are expected to be complete by 2005. One can be sure that with its well-developed financial services industry, the West is certain to press for freer movement of capital in this sector and the Government will have no option but to concede that in the larger interest of preserving the structure of multilateral trade arrangement.

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