Foreign equity composite cap: Banking, defence ‘strategic’, not part of new norm

Don’t want hot money of portfolio investment to come in these sectors beyond a limit: Official.

By: ENS Economic Bureau | New Delhi | Published:July 18, 2015 1:05 am
FDI composite cap, foreign direct investments, FDI India, foreign investment, FIIs, NRI investment India, Indian express, business news According to the extant policy, FDI limit of a composite 49 per cent is allowed in the defence sector but the portfolio investment by FPIs/FIIs/NRIs/QFIs and investments by FVCIs together can not exceed 24 per cent of the total equity of the investee.

Even as the government has done away with the difference between the various forms of foreign investments including FDI, FII and NRI by bringing in composite cap for foreign investment, two sectors — banking and defence — would be kept out of the new provisions given their “strategic importance”.

“The Cabinet’s decision would apply on all the sectors except for banking and defence because these are sensitive sectors, strategically important to the country. We don’t want hot money of portfolio investment to come in these sectors beyond a limit,” a senior DIPP official said.

The clarification follows the Cabinet’s approval for the implementation of composite cap for foreign direct investments and the subsequent statement made by a government official that the move will though benefit sectors such as retail, stock exchanges and power exchanges, it will exclude banking and defence, leaving investors in a state of confusion. The circular clarifying the government’s position will be issued in 15-20 days, the official added.

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Anticipating their inclusion in the composite cap, the banking stocks climbed up 4 per cent on the BSE on Thursday. Currently, foreign investment of up to 74 per cent of the paid-up capital is allowed in the banking sector while the permissible limits through FIIs, FPIs and NRIs is 24 per cent which can go up to 49 per cent through a special resolution by bank. “The FIIs will not be allowed in these two sectors. However, other form of foreign investments like NRI, FCCB, and depository receipts, will be allowed up to the sectoral cap,” the official clarified.

According to the extant policy, FDI limit of a composite 49 per cent is allowed in the defence sector but the portfolio investment by FPIs/FIIs/NRIs/QFIs and investments by FVCIs together can not exceed 24 per cent of the total equity of the investee.

Thursday’s decision will benefit sectors including commodity and power exchange where FDI sub-limit is 26 per cent while the FII sub-limit is 23 per cent and the sectoral cap is 49 per cent. Similarly, while for credit information companies sectoral cap is 74 per cent, FII and FPI limit is 24 per cent. These companies can increase foreign investments through FII up to the sectoral cap.

According to the statement, all existing foreign investment already made in accordance with the policy in existence would not require any modification to conform to these amendments.

The move is expected to boost FDI investment in the country which stood at $30.93 billion in 2014-15, compared to $24.29 billion in 2013-14.

The government also clarified that investments made through Foreign Currency Convertible Bonds (FCCBs) and depository receipts would not be treated as foreign investment unless the debt is converted into equity. Earlier, a government-appointed panel under the chairmanship of former finance secretary Arvind Mayaram had suggested moving to the system of composite cap.

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