The department of industrial and policy promotion (DIPP) has given the go ahead to a proposal of the Reserve Bank of India (RBI) to allow foreign direct investment (FDI) in shares of a company only through an escrow mechanism in order to protect the interest of the investor, official sources told MAIL TODAY.
RBI has found that there are far too many cases where domestic companies have taken funds from foreign investors and used the money for up to 179 days without issuing shares and then returned it just in time to meet the 180-day deadline.
The RBI proposal stipulates that Indian investee companies would be required to open an escrow account with an authorised dealer (AD) bank and funds of overseas investors will flow into this account instead of directly going into the account of the company. The money would be released to the company only after shares have been issued to the investor.
Sources disclosed that DIPP has given an "inprinciple" clearance to the RBI proposal and a formal notification to ensure that FDI investment takes place only through an escrow arrangement will now be drawn up for final approval.
A senior official said, "This will afford a measure of protection to foreign investors as they become entitled to a say in the management of the company once the shares are issued to them."
FDI inflow declined during 2012-13 and the government is keen to attract more overseas investment to spur the growth rate and curb current account deficit (CAD) .
Union finance minister P. Chidambaram considers CAD a bigger worry that fiscal deficit. This is because although fiscal deficit can be financed through domestic borrowing, CAD can only be bridged through foreign exchange.
Chidambaram has been undertaking hectic tours abroad in recent months to hard-sell India as an investment destination.
The economy has turned weaker due to its increased dependence on hot money flowing into stock markets from abroad to finance the record CAD, which had touched 6.7 per cent of GDP in the October-December quarter of 2012-13.
Crisil chief economist DK Joshi said, "Dependence on FII inflow makes the economy more vulnerable to external shocks. These investment are unstable as they are dependent on risks in other countries, for instance, the problems in Europe. This hot money can flow out at short notice and the sudden demand for dollars can cause the domestic currency to depreciate sharply."
The latest RBI figures show that foreign institutional investment in the stock market during April-December went up almost nine times to $16 billion from $2.7 billion in the same period of the previous fiscal.
PROTECTING INVESTOR INTEREST