From UPSC perspective, the following things are important :
Prelims level : Nothing much
Mains level : RBI draft rule on Offshore investments
In a set of FAQs on overseas direct investment published recently, RBI has said that Indian companies are barred from acquiring a stake in any offshore company if that firm has investments in any Indian entity. Still, no formal order or circular to this effect has been issued.
What does the rule say
- It does not matter how big or small the foreign entity’s holding in an Indian enterprise is.
- The ownership of even a single share would put it on the no-go list for Indian investors.
- The aim of this restriction is to check the round-tripping of money.
- Criss-cross investments spanning multiple jurisdictions can serve as conduits for dubious funds to be sent abroad and brought back into the country in some legal guise.
- It could also be a clamp-on tax evasion done by setting up firms in countries with easier tax regimes to hold assets of Indian companies that make money off the domestic market.
Problem with the ruling
- If such practices are rampant, then specific probes need to be ordered, evidence gathered, and cases filed.
- Banning investments in foreign businesses that have Indian interests amounts to disproportionate action.
- In this era of globalization, the collateral damage of such moves to the economy could outweigh the gains.
- Even legitimate businesses wanting to expand their operations globally could find their plans thwarted.
- Not just the future investments, but those already made could also come under the scanner.
- Complying with the rule would be difficult for any enterprise with even moderate dealings abroad. An Indian exporter looking for an equity partnership with a foreign distributor would have to check if the latter has made an investment in India and need a special agreement that prevents the offshore entity from investing in a domestic set-up.
- In a world where such business decisions are freely made, the clause could be a deal-breaker.
- The foreign subsidiary of an Indian company would not be able to directly invest a surplus generated abroad in a domestic venture of its choice, even though such an investment would be above board.
- For decades after independence, over-regulation was the bane of enterprise in India.
- Liberalization offered relief with whole categories of restrictions dumped to encourage greater business freedom. The country has made major gains in global rankings which measure the ease of doing business.
- Regulatory over-tightening puts those achievements at risk.
- Track down round-trippers and tax evaders.