FDI questions

The government’s initiative on changing foreign investment norms in telecom appears to be coming unstuck. What began as a battle for more between the Indian partner (the Ruias of Essar) and Hutch has snowballed into a bigger controversy. The Ruias’ gambit was a letter asking whether government clearance was required for Orascom’s purchase of a 19.3 per cent stake in Hutch Telecom International Limited (HTIL) since this translated into a beneficial stake of 9.5 per cent in the Indian entity, Hutch Essar. This got translated into a letter from the national security advisor saying the deal was a threat to national security. The argument is that Orascom is an Egyptian firm (owned by a Coptic Christian) that has operations in countries like Algeria, Bangladesh and Pakistan. Compounding the mess has been a loan from HTIL to Asim Ghosh, who heads Hutch Essar, and Analjit Singh, while investment firms of the two have bought a 12.26 per cent stake in Hutch Essar. This shareholding is thus counted as being Indian, and will help Hutch Essar ensure that its foreign holdings are within the 74 per cent limit that the new law allows.

All this raises several uncomfortable questions. First, while the HTIL-Ghosh-Singh deal may be in conformity with the law, it does raise doubts about Hutch’s degree of control. Hutch had in fact funded some of the Essar holdings in the past, and some of the Ruia holdings too have been structured as foreign investment in the past. Even when the law allowed only 49 per cent foreign direct investment, companies used a series of pyramid structures to hike beneficial foreign holdings. So, the government was always aware that clever lawyers and accountants could play with the rules. But the issue now is also one of, who exactly is doing that?

There are shades here of the US worrying about Dubai getting control of P&O, and of the Chinese buying Unocal. Nor can the Orascom transaction be considered an offshore deal about which the government can do nothing, since Orascom has the right to nominate a director on the Hutch Essar board. Should there be a list of acceptable sources of funds, in which case will anyone say that Egypt or China (remember Huawei?) is unacceptable? Or should there be a Reserve Bank-style clearance of an investor in sensitive sectors as being “fit and proper” to hold shares in that sector? In other words, should more safeguards be built into the rules for foreign investment in sensitive sectors like telecom, oil, defence, media and banking (to take the obvious examples)? Or should the government’s response be to argue that if the sanctity of the 74 per cent foreign holding can be breached easily, it makes sense to allow 100 per cent holding so that the regulatory arbitrage of market players comes to an end, and all comers are welcome? Even if the immediate episode fades out of the headlines, the issue will surely return and the government will have to make a choice.