As the Indian proxy season heats up,
new rules are opening the country to foreign investment as never before – and could ultimately open up both share-ownership structures and board representation.
In June, the Government of India released new rules pertaining to foreign direct investment (“FDI”) within the country. The rules are part of the ambitious “Make in India” program, part of Prime Minister Narendra Modi’s mandate to raise the global profile of India as a premier market to invest in. The biggest change to the FDI policies are seen as the relaxing of investment limits across broad swaths of the Indian economy, with most sectors now allowing full foreign ownership, rather than the previous 49% limit (key sectors such as defense and telecom may retain caps on foreign investment at 49%, although government approval may be granted to allow for a higher level of ownership).
Limitations on foreign investment have historically served to promote grassroots growth of Indian business and industry. Yet, as India is committing itself to a very active role in the global economy, reducing or even eliminating restrictions on foreign investment is vital for India’s ability to signal to the world that the country is “open for business.” Furthermore, Make in India is also seen as an opportunity to counter India’s reputation as a market that is difficult to do business in, which has played a role in limiting foreign investment, both from investors themselves and foreign companies. Despite these concerns, India surpassed China as the top foreign investment market in 2015; however access to foreign capital is critical to retaining that position, and continuing to increase its overall economic growth.
As for its impact on Indian corporate governance, the rate of increase in foreign investment into publicly-traded companies is likely to influence changes in shareholder structures of Indian companies. Removing ownership restrictions will allow foreign companies that have previously been forced to settle for partial stakes in Indian businesses, or to participate in joint ventures, to take greater control over their Indian businesses. Moreover, greater flow of capital may dilute the power and influence of company promoters or promoter groups. Promoters, in this case, are individuals and/or entities who may act in concert to be the major or the controlling shareholder of a company – sometimes to the detriment of minority shareholders, and/or coherent accounting. Increased access to international capital markets should decrease reliance on such groups for funding, and over time foreign investors could potentially acquire enough shares to influence the outcome of general meetings or proposals that require supermajorities.
Further, the reduction of domestic promoter groups could even lead to new opportunities for diversified board representation, especially if foreign investors coalesce to nominate new board members with no affiliation to promoter groups.
Although the revision to foreign investor restrictions is unlikely to have a major impact on the 2016 Indian Proxy Season, there is the distinct prospect that in future years, foreign investors and companies could end up wielding far more influence within the Indian market.