Friday, July 26, 2013

Why was Arvind Mayaram Committee formed ?

  • The Union Government in March 2013 constituted a committee to clearly define the Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).
  • The 4 member committee consists of Arvind Mayaram, the Economics affairs secretary.
  • The DIPP Secretary, an RBI Deputy Governor and a SEBI Whole-time Member are the other members of the “high power committee.”
  • There is a lot of confusion in the mind of foreign investors because there is no distinction between FDI and FII … The committee has been constituted pursuant to the budget announcements by the Finance Minister. It will simplify definition as to what constitutes FII and what constitutes FDI.
  • The panel would look at the definition of FDI and FII and not the foreign investment caps in different sectors.
  • It was also to recommend policy changes in order to boost  and identify sectors for encouraging FDI in India .



At present what is the definition of FII and FDI ?
  • At present, if an investor has a stake of 10 per cent or less in a company, the investment is treated as foreign institutional investment
  • If an investor has a stake of more than 10 per cent, it is treated as foreign direct investment.


What was the committee up with?


  • The committee has suggested that nine sectors should be categorized as those where Indian ownership will be mandatory or indirectly saying that such sectors should not be allowed 100 per cent FDI.
  • The nine sectors identified by committee include-- FM radio, uplinking news & current affairs, print media (news & current affairs), commodity exchanges, stock exchanges along with depositories and clearing corporation, power exchanges, petroleum & natural gas refining, insurance, defence production and private security agencies.
  • For these nine sectors, the committee has suggested FDI be capped at 49 per cent and clearance given be through the automatic route. Also it said that even if any foreign firm holds 51 per cent in any of these nine sectors, they will remain under Indian ownership.
  • The recommendations of committee also seek to change the stipulation under the civil aviation requirements that effective control and ownership be retained with Indians in airlines, which has been blocking the Jet-Etihad deal.
  • The panel recommended increase in FDI insurance cap to 49 per cent from 26 per cent. The changes recommended by panel, if accepted, will mean significant liberalisation.


MORAL OF THE STORY ?

Broadly the panel has suggested that wherever the caps are at 26% be raised to 49%, wherever it is at 51% it be raised to 74% and wherever 74% it should be made 100%.



What are the reactions of private sector ?
·       A hike in the cap for FDI in defence to 49% may be welcomed by domestic companies like Mahindra which have evinced interest in this space.
·       Hiking the same to 100% in telecom would be greatly welcomed by the mobile operators. In particular it would provide room to Bharti Airtel, which is looking for ways to ease its debt burden.
·       Global companies like Vodafone and Telenor, which currently operate in India with minority Indian partners may then prefer to go solo.



 

Telecom sector in India  at present !!

 





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Additional Reading !

What is automatic route and government/approval route for FDI ?

i. Automatic Route

FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. 
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