Govt liberalises FDI policy

Relaxing the rules for foreign direct investment (FDI) in the country, the government on Thursday decided to permit the issuance of equity to overseas firms against imported capital goods and machinery.

Crucial changes have also been made to norms regarding convertible instruments and downstream investments.

In an interview with CNBC-TV18, Dhiraj Mathur, PwC, speaks about the FDI policy and gives the outlook going forward.

Here is a verbatim transcript of the exclusive interview with Dhiraj Mathur on CNBC-TV18. Also watch the accompanying video.

Q: Out of all the changes that have been introduced today, is the one that is relating to joint venture perhaps the more important one? There have been several cases where India Inc has not allowed this foreign joint venture partner to enter the same field, so how crucial has this step been?

A: I think it’s an important step. We have a very robust judicial system. There is no need for policy instruments being used to sort of adjudicate between two parties in a commercial dispute. And that’s essentially what this condition did. As the secretary rightly pointed out, this condition wasn’t there in the very beginning and infact it started getting imposed sometime in the middle or late 90s and then it became part of a press note. So, there is no relevance for such a condition anymore. In any case companies after 2005 don’t have this clause at all. It is only the older companies that came in prior to 2005 potentially face this blockade.

Q: Do you think this will encourage FDI? Will it encourage foreign companies in India with JVs operational prior to the January 2005 to bring in additional investments as well as technology?

A: Absolutely. It removes the unnecessary pain, if I may use that expression, because for all the diversified multinationals that are present in India who have multiple joint-ventures, a lot of them have been able to successfully negotiate and get the consent of their earlier partners. But some of them are having a problem. Why should we not allow someone who came in prior to 2005 and wants to further invest and diversify in the Indian economy to do so?

Q: Department of Industrial Policy & Promotion (DIPP), in the case of convertible instrument, has said and allow the option of specifying a conversion formula in place of an upfront conversion price. What will be the benefits that will accrue from such a move? We understand initially that this is really going to help start ups, is that correct?

A: Yes, that’s right. Essentially companies that I have ventured, new ventures, in some of the more esoteric areas where typically valuations at this point of time would be very-very low and giving them the flexibility of giving a formula, a). B) mandating that the price of conversion cannot be lower than the price at the time of issue to take this from downside, while giving them the benefit of cashing in on the value that they created between the time of issue and time of conversion.