THE case of Mid-Day Multimedia's initial public offer (ipo) has made clear the Indian political class' aversion to foreign investment in print media. Foreign investment in print media was banned by a 1955 cabinet resolution. But in the last one year, a door opened for foreign equity participation—the portfolio investment kind—in print media through Foreign Exchange Management Act (fema), 1999, regulations.
Section 6 (3) of fema empowers the rbi to regulate the transfer or issue of any security by a person or entity resident outside India. Foreign direct investment (fdi) and foreign portfolio investment are clearly delineated, and it's only in the case of fdi that the rbi requires companies engaged in any of 13 specified sectors—banking, defence, atomic energy, petroleum, print media etc—to seek approval of the Foreign Investment Promotion Board before issuing shares to foreign investors. But foreign entities are free to purchase their shares in the stockmarket, subject to certain limits. So, Mid-Day Multimedia marketed its issue to both Indian and foreign investors.
On February 11, a day before the issue opened, the government woke up. It felt that the operative words "foreign investment" used in the 1955 cabinet resolution covers both "foreign direct investment" and "portfolio investment", the segregated terms used in fema (of course, the concept of "foreign portfolio investment" was unknown in 1955). As a result, the government made the rbi amend fema to incorporate a specific prohibition clause pertaining to foreign portfolio investments in Indian print media. The rbi promptly notified this on February 16. Meanwhile, Mid-Day, preferring not to take on the bureaucracy, had already decided not to accept fii bids.
The government's actions make little sense. One, since all fii investment in any Indian firm is limited to 24 per cent, there is no chance that the "foreign hand" can get a controlling stake through portfolio investment. Two, foreign agencies like Reuters are allowed to set up wholly-owned subsidiaries in India to supply news to Indian print media. Three, by disallowing portfolio investment in print companies, the government has only succeeded in hurting Indian companies. Print companies are now condemned to always have a lower share price than they deserve, since the vast pool of fii money is denied to them. Four, foreign portfolio investments in the other 12 sectors, where fdi requires approval, will continue to be allowed.
Says Tariq Nakhooda, assistant vice-president, Prebon Yamane (India), one of the lead managers for Mid-Day's ipo: "Going by this logic of sensitivity, would not the 12 other industries specified in the fema regulations for fdi be sensitive too?"
In 1994, a group of ministers headed by N.K.P. Salve undertook a review of the 1955 resolution. Barring Arjun Singh, the group favoured revoking the ban on foreign investments in print. Not only was the proposal not implemented, the Narasimha Rao government didn't even bring its recommendations before Parliament. But one small exception was incorporated in the ban: foreign investment in print media dealing with technological and scientific subjects was allowed. Currently, the issue is being considered by a parliamentary standing committee headed by Somnath Chatterjee.
Interestingly, among companies listed on the bse, there are already two—Sandesh Ltd and dsj Communication Ltd—which are in the non-exempt print media sector but have foreign participation in equity capital. Sandesh is a popular Gujarati daily and foreign holding in it as of September 1999 was 0.06 per cent (in the form of non-resident Indian investment) of its paid-up equity capital. dsj Communication publishes a fortnightly stockmarket magazine and it had 1.32 per cent foreign holdings as of March 2000 (1.28 per cent in the form of investment by foreign collaborators and 0.04 per cent nri investment). Does the rbi's February 16 notification, amending the regulations under fema, apply to such existing cases? It is not clear.
Clearly, the government needs to rethink. As of today, foreign entities can freely buy shares in sectors like defence and atomic energy, but not in print media! What is it that makes the printed word more "sensitive" than atomic energy?