ONE HOPES THAT Indian investors will soon be able to invest in instruments designated in foreign currency against underlying shares of domestic and foreign companies (IDRs) as indicated by the Chairman of the Securities and Exchange Board of India. There are many arguments in its favour. For the Indian investor it is a limited opportunity to invest abroad. With a deficit on the current account, the country's external sector has, no doubt, been a source of vulnerability and is still so in the management of the macro economy. But there are many positive aspects too, warranting a careful and calibrated approach to freeing the external sector from stultifying controls on the capital account.

The buoyancy in the software and IT-enabled services sectors and inward remittances by non-resident Indians would have delivered for the economy a surplus on the current account by now, had it not been for the runaway rise in the price of oil. While the outlook on the oil front is still somewhat hazy, with the tension in the West Asian region showing no signs of easing up, India is no longer that dependent on these two sources alone. Its manufacturing exports too are beginning to show a degree of robustness that suggests a capacity to measure up to global benchmarks of quality and price competitiveness. But more importantly, India is aspiring to be recognised as a global economic powerhouse or at least one that will emerge as one in the not-too-distant future. A closed economy on the capital account front or the lack of even a semblance of liberalisation on this count would be poor advertisement for a nation keen to project a new visage.

While in theory the facility is available to both foreign and domestic corporates, it is safe to say that it is the latter who would seek to access the base of domestic investors. For the former, the tax issues involving overseas corporates, with specific reference to the possibility of double taxation, could defeat India's attractiveness as a source of capital. But domestic corporates, especially the small and medium enterprises could seek to profit from it. If it accelerates the flow of capital formation in the domestic economy, the outcome should also prove particularly useful in handling the problem of the country's burgeoning foreign exchange reserves, currently running at $140 billion. Rather than park them in treasury instruments of the US or the European Community, as is the practice now, and remain hostage to the fortunes of the Western economies, the RBI can do better by providing resources for investment in productive assets in the domestic economy.

It is one thing, however, to create a policy framework for triggering investment flows; translating it into operational success is another matter altogether. Considering that it is nearly two years since the company law had been amended to enable issuance of IDRs, the absence of capital market regulations is particularly unfortunate. The SEBI chairman had already referred to the long lead-time for completing procedural formalities in accessing the domestic capital market. The success of the scheme depends of how effectively SEBI addresses this problem.

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