The Reserve Bank of India has proposed relaxation to the rules on Call and Put Options. According to sources, in a letter to the finance ministry, RBI has asked the government for downside protection to foreign investors upon their exit- the move comes after Tata Sons moved the central bank in the DoCoMo matter.
Speaking to CNBC-TV18, Romal Shetty, ED and National Head, KPMG said that if norms are in place, it will ease entry of foreign flows in India. He believes global telecom companies are looking to enter India and there must be a safeguard to protect the Indian company's interest in industry.
Adding to the discussion, Vivek Kathpalia of Nishith Desai Associates' welcomes RBI recommendations on downside protection for foreign direct investment exits. According to him, the downside protection is very important for the realty sector.
Below is verbatim transcript of the discussion:
Romal Shetty, ED and National Head, KPMG
Q: Is this move going to de-bottleneck and allow a lot of foreign investments?
A: Foreign investments are based on two things – (1) the comparative market and (2) something like this - this is a positive move because a number of foreign operators have come in and to some extent have burnt their hand. This allows and option to exit. However, in any market whenever foreign investors come in, they look at both entry as well as exit to be reasonably easy.
In this case also it is not about that DoCoMo is making any profits, it is just cutting its losses and it had an agreed price. So, from an India market perspective this is a positive signal because over the last few years we have not seen any new foreign investor coming in.
We had talks about AT&T, Deutsche Telekom coming in but nobody has come in. This helps in that whole process for them to make a decision to come into India and most of them will not come as Greenfield, they will come in with a tie-up because it is not possible to set up a network and run it from scratch now. Therefore, in that sense it is a positive move.
Q: What about the counter argument? The reason why these rules were put up in the first place that Indian parties are weaker parties when you argue or when you are negotiating with big foreign investors and the rule like this enables the Indian partner to say, sorry, you may want to come at these conditions but my rules do not allow it and thereby extract a better term from the foreign investor. Doesn't that argument hold any more?
A: There are also certain conditions. There is a lock-in period for a particular number of years, so it is not something which will happen immediately.
Two, in the telecom side of it, I would hesitate to say; actually Indian players are very small, we need to have large sums of capital. Therefore, these are big players. These are not small players.
Q: Can you elaborate on which are the sectors that would benefit from this? You spoke about the overall foreign inflows increasing but sector wise or company wise any more details?
A: I may not be able to answer because I am a telecom guy, but in an overall perspective, from an economy and foreign investor perspective, these are repeated foreign investors who come in. Sometime your investments will not hold well, not necessarily because of various reasons.
In the telecom market there is a hyper competition; it's not like four-five operators; there are eight or nine, so some of them will suffer losses even though they come with big brand name, good products in whichever market they serve but this at least gives them a reasonable sense that even if I have to cut my losses, I know where I can exit.
Therefore, in that sense anything which brings clarity to investors, foreign operators in this kind of a market is always helpful and I would assume that that would be similar for other sectors as well. There is no doubt about that. If this gets through, it is still at an approval stage.
Q: There are instances where a buyback is arranged from the existing Indian promoter at a prearranged price, for instance in insurance, a lot of guys who came in, actually came in looking for 49 percent. The law at that time allowed only 26 percent, the local partner were Dabur, Bajaj and Exide, who were not interested in insurance but some of them agreed that they would sell-off the shares when 49 percent rule came in at a pre-agreed price – that price is lower. Technically, if insurance companies had to pay market price, they will have to pay more now. Do you think it will work the other way as well and this time the foreign investor will be able to buyback at a lower price?
A: What you are saying is possible but as long as you have reasonable safeguards; there will be some safeguards or some conditions pursuant to which a different price or preordain price will be agreed. So there would be both ways but to some extent if you keep thinking and that's where the economy opens up, you cannot think of all the scenarios because that will only put in more and more restriction.
There has to be some safeguards in place and then it must allow the companies to do whatever they wish to. The Indian promoters may also not necessarily agree to higher price just because of some specific reason, they look at the business return and therefore, they would make a firm decision. So, it can go both ways, I agree but it is time to open it up.
