Indian FDI liberalisation may lead to policy reform

Author: | Published: 8 Nov 2011
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India’s lawyers expect a central bank decision to liberalise the country’s foreign direct investment (FDI) policy to promote further easing of financial sector policies.

The Reserve Bank of India (RBI) last week revealed plans to ease FDI procedures by amending its foreign exchange management regulations. The proposed revisions will remove the need for RBI approval on the transfer of shares between non-resident and domestic investors in several key areas including the financial services sector.

RBI permission has also been removed for the transfer of shares where the Foreign Investment Approval Board (FIPB) has already given its clearances and the Securities and Exchange Board of India guidelines have been adhered to.

The move aims to entice global investors onshore. But it should also benefit the entire financial services sector, including the non-banking finance companies.

Kotak Mahindra Capital’s Ajay Vaidya said the proposed amendments were exceptionally logical and had been welcomed by market participants.

"By removing one layer of approval, these measures ensure faster execution and ease of investing," he said. "This will promote operational simplicity."

The move did not, however, represent any broader change of policy, he explained. It followed a 2004 ruling by the FIPB which enabled the transfer of shares between residents and non-residents to happen automatically without prior FIPB approval.

"The RBI has now ruled it should follow FIPB’s 2004 decision," said Vaidya. "And rightly so; if a share transfer is allowed by one regulator then the RBI should automatically permit it."

He added he would not be surprised if more policy liberalisations followed. Pending insurance and banking bills would be obvious vehicles for India’s regulators to introduce further reform, he said.

"The regulators want to keep the momentum going," he said. "But they will first need to look at the bigger picture and reach an agreement with regards to certain policy decisions, such as capping bank voting restrictions at 10%."

"Once an agreement is reached on such policy decisions, it will further encourage the process of liberalising both sectors," he said.

But S&R Associates’ founding partner, Sandip Bhagat said further liberalisation was still very much a work in progress.

Indian corporates would be behind such a move in the banking sector, he said, as it would enable them to more-easily gain a banking license. An easing of regulations governing the insurance sector was also something a number of market participants had been calling for, he said. But he believed a relaxation of rules in either sector was more a hope than a certainty.

"There currently is a give and take happening between the RBI, the government and the corporate sector," he said. "But I am bit more reserved with regards to the likelihood of further liberalisation."

"It is equally possible the RBI goes in the opposite direction and introduces stricter policies," he said.