- List or Trade policy
- How can India implement List and Trade policy?
The brick and mortar of FDI 2.0
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- Foreign Direct Investment (FDI 1.0) has been welcomed in India irrespective of whether or not its equity structure includes Indian public shareholding.
- However, the world has undergone a structural change with the emergence of Internet Multinational Companies (MNCs) that excludes domestic (Indian) public shareholding. These firms distribute their profits to themselves, which demands a policy response.
Example of China
- Due to exclusion of profits sharing with domestic shareholding, China banned Internet MNCs. This led to China creating nine out of the 20 global Internet leaders.
- China mandated MNC firms to transfer technology, share patents and enter into 50:50 joint ventures with Chinese partners in return for market access.
List or Trade policy
- FDI 2.0 could deploy ‘List or Trade in India’ as a strategic policy tool to enable Indian citizens become shareholders in MNCs.
- In 1978, the Indian government adopted a policy that required equity dilution by 100% foreign-owned companies. This led to the ‘Listing of MNCs’, and many of which then provided handsome returns to both MNCs and Indian shareholders.
- It is estimated now that listing Indian subsidiaries of MNCs alone could add as much as ₹50 lakh crore to equity market capitalisation.
How can India implement List and Trade policy?
India could implement the following set of proposals:
Proposal 1 (List in India):
- Majority (more than 51%) foreign-owned Indian-listed MNCs could be eligible to domestic company tax rate whereas unlisted MNC subsidiaries could be subjected to a higher tax rate.
- Many countries such as Bangladesh, Vietnam and Thailand have used tax incentives to attract listing by MNCs. Mexico is most successful in attracting cross listings.
- To ensure the success of this proposal, the government will need to reconsider the present policy of allowing 100% MNC-owned subsidiaries to compete with their listed Indian counterparts that erodes the value received to Indian shareholders.
- However, this Proposal will not achieve the objective of increasing Indian participation in the Internet MNCs due to complex issues in revenue booking.
- Hence, there is a need for additional initiative to enable Indian investor participation in the ownership of parent MNCs’ shares.
Proposal 2 (‘Trade in India’)
- In this proposal, Indian investors could buy shares of parent MNCs (where global profits and value get consolidated).
- This can be permitted within the $250,000 Liberalised Remittance Scheme (LRS) limit. Indian bourses could admit only S&P 500 stocks.
- The Mexican Stock Exchange allows trading of international shares listed in other stock exchanges. India could replicate such models.
Steps needed to implement 2nd proposal
For successful implementation of Proposal 2, the Indian government may need to facilitate following measures:
- Permit Indian bourses to implement international trading system on the lines of Mexico.
- Parent MNCs in S&P 500 with business interests in India could be mandated to facilitate trading of their shares in India.
- For taxation purposes, no distinction should be made between transactions in comparable domestic and foreign securities.
- Liberalised Remittance Scheme (LRS) implementation for buying foreign stocks in GIFT City/NSE/BSE could be simplified and work as single click functionality.
- Educate Indian investors about the value of diversification of their portfolio in international stocks for achieving better risk adjusted returns.
- The government could facilitate access to ultra-low cost S&P 500 Index Funds using Indian e-KYC.
- For Indian citizens, U.S. estate taxes (40%) apply above purchase of $60,000. To mitigate this burden, the National Securities Depository Limited (NSDL) could design a sovereign trust for holding parent MNC stocks. The NSDL could then issue Bharat Shares to retail investors.
- In addition, the government could make available a ‘Fully Disclosed Model’ for holding foreign stocks in line with NSDL/Central Depository Services Ltd (CDSL) system.
- Increasing Indian equity ownership of MNCs would offer diversification benefits and make Indians more prosperous.
- Wealth distribution through mutual funds would create a virtuous cycle of innovative ideas, entrepreneurship, higher taxes, social and physical infrastructure for the benefit of Indian society.
- MNCs would earn the goodwill of Indian consumers while expanding their investor base. In other words, this is a win-win for all stakeholders.