INDIA: MODEST LIBERALIZATION OF INVESTMENT NORMS IN WAKE OF

UNCLAS SECTION 01 OF 02 NEW DELHI 000191 SIPDIS SENSITIVE STATE FOR SCA/INS AND EEB USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD DEPT PASS TO USTR MDELANEY/CLILIENFELD/AADLER DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN E.O. 12958: N/A TAGS: EAGR ECON EFIN EINV ETRD IN SUBJECT: INDIA: MODEST LIBERALIZATION OF INVESTMENT NORMS IN WAKE OF FINANCIAL CRISIS REF A) SECSTATE 04706 B) NEW DELHI 174 ¶1. (SBU) Summary. In response to reftel A, Post reports that India has not adopted nor indicated plans to restrict sovereign wealth fund (SWF) investments generally, although media reports that part of the government may wish to restrict Singapore's two SWFs in India. More broadly, India has not erected any new investment barriers; in contrast, it has liberalized some investment channels since the financial crisis hit, hoping to mitigate the loss of portfolio capital inflows. For India, foreign investment flows have been seen as critical to maintaining infrastructure development momentum as well as helping support the rupee. This has prompted the government and regulators to consider more liberalization, not less. End summary. MODEST INVESTMENT LIBERALIZATION -------------- ¶2. (SBU) Unlike its trade stance (reftel B),India has moved several times in recent months to liberalize foreign investment flows, as it tries to mitigate the downward pressure on the rupee wrought by the net outflow of portfolio investment through most of ¶2008. In October last year, the Securities and Exchange Board of India (SEBI) reversed the year-old ban it had placed on certain offshore derivative portfolio investments, known as participatory notes. Further, in October 2008 and January 2009, the central bank, the Reserve Bank of India (RBI),relaxed the limits on foreign institutional investment allowed in corporate debt bonds, raising the ceiling from $3 billion to $15 billion. ¶3. (SBU) Meanwhile, the GOI has allowed planned foreign investment in the slowly opening pension sector to go forward: recent guidelines invited fund management bids from private sector companies for the first time, including those with 26% FDI (the equivalent of the insurance sector). In December, the Ministry of Finance finally introduced its draft insurance bill amendment in Parliament, which seeks to raise the FDI cap from 26% to 49%. Domestic political considerations and the short timeframe before national elections in April-May may delay the bill's passage, but our contacts tell us the Ministry of Finance is squarely behind the bill. ¶4. (SBU) In addition to these actions, different ministries have proposed, for Cabinet approval, further FDI relaxations in different sectors, including civilian airlines and single and multi-brand retail. Although the Cabinet has not passed these proposals for consideration, the proposals reflect that several ministries, including the Ministry of Commerce and Industry (MOCI),are inclined to look for liberalized investment in order to enable more capital into various sectors, which the financial crisis otherwise blocks. For example, the domestic civilian industry is suffering from lower demand after a period of rapid expansion, which may necessitate foreign capital infusion to keep some airlines going. Finally, in late January, MOCI proposed that separate investment caps for foreign portfolio investment (what India calls "foreign institutional investors" or FII) and direct equity in Indian companies be eliminated, so that either type of investment might reach a new "composite" ceiling, rather than separate ones for each type of investment. This would provide more flexibility to foreign investors. ONE POSSIBLE MOVE AGAINST SWFS -------------- ¶5. (SBU) One possible regressive move on investment, and pertaining to SWFs specifically, is a recent news report that the Finance Ministry has proposed that the government revise its Comprehensive Economic Cooperation Agreement (CECA) with Singapore to prohibit the two Singapore SWF's, Temasek and GIC, from together exceeding 10% investment in a single entity. Currently, the CECA explicitly exempts Temasek and GIC from India's 10% cap on all entities from the same owner. COMMENT -------------- ¶6. (SBU) Capital-starved domestic companies mainly see foreign investment as one of their best options for shoring up expansion NEW DELHI 00000191 002 OF 002 plans - or for the hardest hit, for surviving the economic downturn. The government has been inclined to agree, with the added cushion that FDI provides to the strained balance of payments. All these factors have contributed to a continued, if not enhanced, welcome to foreign investment in recent months. While the Cabinet has not moved on the FDI liberalization proposals, the fact that the government landscape contains almost no calls for investment rollback is a positive sign. MULFORD