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Jobs for the boys

By Sunil Jain
March 24, 2003 15:34 IST
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The government may or may not have been successful in its quest for creating several million new job opportunities for the country's unemployed, but what it has managed is to create a brand new employment niche thanks to its mindless policies.

A brand new niche for brokers whose main job is to get these very policies reversed, sooner rather than later.

The latest such policy is the one to restrict the foreign ownership, whether by way of foreign direct investment or by way of loans, to just 26 per cent of the capital of the company in the case of television news channels.

Immediately, television channels such as Star, NDTV, and possibly a few others, will have to change their ownership structures in order to be able to function out of India, to be able to either uplink directly to a satellite, or to send a signal to places like Hong Kong from where they can uplink to a satellite.

But this column is not about Star TV, it's about why the policy of restricting foreign direct investment is a stupid one, in most sectors. Take telecom. Initially, the government allowed foreign investment in the telecom sector, but capped this at 49 per cent.

Why 49 per cent? Because the government didn't want foreigners to 'control' the telecom sector, presumably because it was a 'sensitive' one, vital for our national security and things like that.

But if this was so, why did the government allow 100 per cent foreign equity in the case of Internet service providers, which is equally 'sensitive', whatever that term means -- I mean, if cellular phone firms can tap your conversations and send the material abroad just because they're owned by foreigners, surely Internet-providers can do the same with your e-mails?

And why does the government now plan to increase this 49 per cent limit for other telecom players to 74 per cent?

For the same reason why, after capping the foreign investment in the insurance sector at 26 per cent, it now wants to raise this to 40 per cent. And the reason is something called capital.

In the case of telecom, the government itself has estimated that the country needs $  50 billion over the next five to seven year period, if the tele-density (the number of people owning phones divided by the country's population) is to increase from 5 to 15.

Where's this Rs 250,000 crore (Rs 2,500 billion) supposed to come from? Even if a large part comes from the debt market and in the form of suppliers' credit, you still need a very large amount to come in the form of equity, and very few Indian companies have this kind of money.

So, if the business has to grow, where is the equity going to come from, if there is a cap fixed on the equity of the foreign partner?

Let's say a firm has an equity base of Rs 100, 49 of which is owned by a foreigner and the rest by an Indian.

Now, if this equity has to be trebled to fund the firm's growth plans, and the foreigner to be restricted to 49 per cent, the Indian partner has to have the ability to contribute another Rs 102.

But if he doesn't have the money, this means the business simply cannot expand. This, by the way, is something we witnessed in the case of Maruti Udyog some years ago. Suzuki wanted the business to grow, but could not contribute more equity unless its partner (the Indian government) did the same -- otherwise, its equity share in Maruti would have gone up.

And since the government didn't want to do so, Maruti was starved of funds, and so couldn't introduce new models for years.

So, since the business has to grow, the FDI limits just have to be revised upwards, and that's where the brokers come in.

To try and convince the bureaucrats and the politicians to raise the ceilings. Imagine that, you come up with a policy that's designed to create problems, and then create a business for people to try and solve these very problems!

Even more interesting is what some telecom firms have done to circumvent the rules over the past few years.

They figured out that they didn't have the capital to run the business (cellular firms have accumulated losses running into several thousand crore rupees, so they got into arrangements with their overseas partners, and transferred control to them through a series of intermediate conduits designed in such a manner as to conceal the real nature of the transaction.

A leading cellular operator I know once complained that he wanted to exit in favour of his foreign partner, but couldn't do so as he didn't have the guts to sell his shares through a conduit -- what happened if the government discovered he'd sold his holdings in this manner, was his fear.

Now you can't really blame the telecom operators who've done this -- the law was a ridiculous one, and it was only natural that it would be violated.

Indira Gandhi's 97 per cent-marginal tax rates, and FERA, similarly, were stupid laws and forced people to break the law. Both have been scrapped for precisely this reason. It's time to do the same with the FDI restrictions.

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