Commodity exchanges’ FII rules relaxed

FIIs can now invest up to 23% in commodity exchanges without seeking prior approval of govt.

Written by Agencies | New Delhi | Published: April 10, 2012 3:16 pm

Foreign institutional investors (FIIs) can now invest up to 23 per cent in commodity exchanges without seeking prior approval of the government,as per the new foreign investment norms announced by the Industry Ministry today.

“Such investment (up to 23 per cent) by FIIs,in commodity exchanges,will,therefore,no longer require Government approval,” said the Department of Industrial Policy and Promotion’s (DIPP’s) consolidated FDI policy,which comes into effect from today.

However,foreign direct investment (FDI) will continue to need the approval of the FIPB.

At present,foreign investment,within a composite (FDI and FII) cap of 49 per cent,under the government approval route is permitted in commodity exchanges.

Within this overall limit of 49 per cent,investment by registered FIIs is limited to 23 per cent and investment under the FDI scheme is limited to 26 per cent.

“It has now been decided to liberalise the policy and to mandate the requirement of government approval only for FDI component of the investment,” DIPP said.

“This change aligns the policy for foreign investment in commodity exchanges,with that of other infrastructure companies in the securities markets,such as stock exchanges,depositories and clearing corporations,” it added.

DIPP has also decided that the consolidated FDI circular will be announced every year instead of six-monthly basis. The next policy would be on March 29,2013.

The policy has clarified that subject to the sectoral foreign holding cap,companies will now need prior permission from RBI for an overall FII holding of beyond 24 per cent.

After RBI permission,the companies can allow FIIs to hold more than 24 per cent after the approval for the same by their boards and shareholders.

Further,the consolidated FDI circular clarified that FDI is allowed only in financial lease activity carried out by NBFCs.

“It has been clarified that the activity of leasing and finance,which is one among the eighteen NBFC activities,where induction of FDI is permitted,covers only financial leases and not operating leases,” it said.

In order to discourage import of sub-standard machinery,the government has decided to withdraw the facility of giving equity in lieu of import of second hand equipment.

“With a view to incentivise machinery embodying state-of -the-art technology,compliant with international standards,in terms of being green,clean and energy efficient,second-hand machinery has now been excluded from the purview of this provision,” it said.

In March last year,relaxing the rules for FDI in the country,the government had allowed issuance of equity to overseas firms against imported capital goods and machinery including second-hand machinery.

Industry has raised concerns with the government that the Indian capital goods sector,including the machine tools industry,construction and textile machinery,has been suffering because of import of cheaper second hand machinery,which is often sub-standard.

During April-January,2011-12,India attracted FDI worth USD 26.19 billion,an increase of 53 per cent over the same period last year.

Further,the government has also permitted foreign venture capital investors (FVCIs) to invest in the eligible securities like equity and debt,by way of private arrangement and purchase from a third party also,subject to stipulated terms and conditions.

“Sebi registered FVCIs have also been permitted to invest in securities on a recognised stock exchange subject to the provisions…,” the policy said.

The government has allowed Qualified Financial Investors (QFIs) to acquire equity shares by way of right shares,bonus shares or equity shares,on account of stock split/consolidation or equity shares on account of amalgamation,demerger or such corporate actions,subject to the prescribed investment limits.

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