By Tarun Kumar G. Singhal, Raman Jokhakar Chartered Accountants
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The objection to Tata Sons buying out its joint venture partner NTT Docomo’s stake in Tata Teleservices at a predetermined price is a needless restriction on doing business. True, the transaction runs foul of the Foreign Exchange Management Act, which prohibits such stake purchases at a price wholly out of line with the current fair value. The intent of the law is, evidently, to prohibit siphoning off of capital. But to meet that goal, should India adopt a blunt instrument that invalidates all foreign investment in India with put and call options that specify a price that could well be at variance with future fair value? Clearly not. Sometimes, intelligent discretion is better than a rule. The government and the RBI should allow the transaction to go ahead. And prevent a turmoil in the insurance industry, where use of put and call options was rife when foreign insurance companies took a 26% stake, anticipating a hike in the ceiling later.
Two issues are at stake. One, how companies source capital. Hesitant foreign capital could be persuaded to enter the country by offering it guaranteed exit options that minimise or quantify the possible loss it could make. Should India say no to such capital? Should all equity investments that come with put/call options automatically be deemed suspect? The answer is a resounding ‘No!’ The second issue is how to prevent a liberal view on put/ call options at the time of entry of foreign capital being misused by Indian companies to siphon capital out.
The way out is to check if the bathwater contains a baby or not, before throwing it out. This calls for use of judgement and intelligence. Scam-scarred policymakers in India are too scared to allow themselves to use discretion, and want to go by the rule book, regardless of whether it meets the larger goal, to subserve which the rules were framed. The signal a stalled Tata-NTT Docomo deal would send out to the world is that India continues in the grip of political timidity, leaving passing the buck the only game in town, even in these, post-UPA, post-policy-paralysis, so-called good times.
(Source: Editorial in The Economic Times dated 26-03- 2015.)
