Operation of FDI caps in India and corporate control mechanisms

While India has generally been following an open door FDI policy, a few areas are still subject to caps on FDI and/or specific government approval. One of the justifications for the same is the need to retain a degree of control over the operations of the investee companies in Indian hands. Earlier this year, the government specified the methodology for calculating direct and indirect foreign equity in Indian companies in order to remove ambiguities in calculating the extent of FDI in a company. Based on empirical evidence this paper argues that percentage of shares or proportion of directors do not necessarily represent the extent of control and more direct intervention would be required if the objectives of imposing the caps are to be achieved.