In a significant simplification of the foreign direct investment policy, the Union Cabinet has approved a proposal to scrap the distinctions among different types of overseas investment by shifting to a single composite limit.
The new policy also means portfolio in portfolio investment up to 49% will not need government approval or have to comply with sectoral conditions as long as it doesn't result in transfer of ownership and or control of Indian entities to foreigners. This will immediately benefit sectors such as multi-brand retail and pharmaceuticals that do not have sublimits within the overall limit.
The two sectors will henceforth not need approval for increasing portfolio investment up to 49% of the total holding.
The Department of Industrial Policy and Promotion (DIPP) will issue a separate circular to clarify that even the sub-limits for FII investment in many sectors such as banking and defence will go.
Till that happens, sectors such as banking, defence, credit rating, power exchanges and commodity exchanges, which have a carve-out for portfolio investment within the overall foreign limit, will continue to have that restriction.
“One of the most important decisions in relation to the investment is the introduction of composite caps for simplification of foreign direct investments,“ Finance Minister Arun Jaitley said after the Cabinet meeting.
Shares of private banks and credit rating companies rallied sharply after the announcement on the hope that this would mean greater room for overseas investment A government official later clarified that the sub limit for portfolio investment in the banking and defence sectors will continue for now.
The composite foreign investment caps will now encompass all types of foreign investments -foreign direct investment (FDI), foreign institutional in vestors (FIIs), foreign portfolio investors (FPIs), non-resident Indians (NRIs), foreign venture capital investors (FVCIs), qualified foreign investors (QFIs), limited liability partnerships (LLPs) and depository receipts (DRs). Following this, Indian companies can now have just two kinds of capital -Indian and foreign -ending the categories that made the FDI policy complicated.
In the case of banks, FII investment is limited to 49% within the overall cap of 74%. In the case of commodity exchanges, FII is capped at 23% within the overall limit of 49%.
Foreign currency convertible bonds (FCCBs) and DRs, having underlying instruments in the nature of debt, will be counted as overseas investment only if converted.
Finance Minister Jaitley had proposed the changes in his February Budget. DIPP, the nodal agency in charge of foreign investment in the country, had moved the proposal.
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