THE GIST of Editorial for UPSC Exams : 04 october 2019 (The brick and mortar of FDI 2.0 (The Hindu))

The brick and mortar of FDI 2.0 (The Hindu)

Mains Paper 2 : International
Prelims level : FDI 2.0
Mains level : International Trade

Context

• The world has undergone a structural change with the emergence of Internet Multinational Companies (MNCs) such as Microsoft, Google, Facebook and Twitter that are based on ‘winner-takes-all’ platform business models.
• These firms are characterised essentially by inequitable dynamics, since they distribute most gains to themselves vis-à-vis their host countries. This situation demands a policy response.

Why China banned Internet MNCs?

• This led to China creating nine out of the 20 global Internet leaders. China strategically deploys a quid pro quo policy.
• MNC firms are mandated to transfer technology, share patents and enter into 50:50 joint ventures with Chinese partners in return for market access.
• Given our political system, India will obviously need to follow a new FDI 2.0 policy to achieve more desirable outcomes.
• Rather than accepting the ‘winner MNC takes it all’ as fait accompli, FDI 2.0 should harmonise interests of all stakeholders including Indian consumers, the government and investors.
• FDI 2.0 could deploy ‘List or Trade in India’ as a strategic policy tool to enable Indian citizens become shareholders in MNCs such as Google, Facebook, Samsung, Huawei and others, thus capturing the ‘upside’ they create for their platforms and companies.
• This is equitable to all, since Indian consumers contribute to the market value of MNCs.

A road map for India

• 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.
• 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 accruing to Indian shareholders.
• Proposal 1, by itself, will not achieve the objective of increasing Indian participation in the fair value of Internet MNCs. This is because of complex issues in revenue booking that result in low profits in Indian subsidiaries. Hence, there is a need for additional initiative by way of proposal 2 to enable Indian investor participation in the ownership of parent MNCs’ shares.
• Proposal 2 (‘Trade in India’ i.e. U.S. dollar-denominated parent MNC Shares to be ‘Admitted for Trading’ on Indian bourses]: 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.

Mirroring Mexico

• 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. MNCs would readily agree as it does not envisage listing in India.
• For taxation purposes, no distinction should be made between transactions in comparable domestic and foreign securities.
• 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.

Conclusion

• To 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, employment, consumption, 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.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Consider the following statements regarding 'Private member bill ':
1. Bill introduced by a person who is not a member of the Parliament.
2. Presently only three private member bills can be introduced per session.
3. The admissibility of a private member’s Bill is decided by the Chairman and Speaker in Rajya Sabha and Loksabha respectively.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: B
Mains Questions:
Q.1) ‘List or trade in India’ should be used as a strategic policy tool to enable Indians to become shareholders in MNCs. Comment.