The Cabinet on Thursday approved the implementation of ‘composite cap’ for foreign direct investments, essentially doing away with the distinction between various foreign investments by FIIs, NRIs and others FDIs.
After the Cabinet meeting, finance minister Arun Jaitley said, “From now onwards, all FIIs, NRIs and other foreign investments … will be clubbed. It will be constituted as a composite cap,” while adding that it will help in simplifying foreign investment norms.
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.
However, confusion prevailed over the applicability of the composite cap in two sectors — defence and banking. While a senior official said that the “sectoral conditions i.e. individual FDI and FII limit would override the decision in two key sectors — banking and defence,” experts said that the banking sector would be beneficiary of today’s decision. The banking stocks climbed up 4 per cent on the Bombay Stock Exchange, seemingly factoring in the possibility of getting benefits of the composite cap.
“For sectors such as banking, where currently portfolio investment was restricted up to 49 per cent, the amendment seems to suggest that the said limit could now be raised up to the overall limit of 74 per cent subject to government approval route for the excess,” Vivek Gupta, partner, BMR Advisors, said.
Currently, foreign investment 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.
Similarly, 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.
“Foreign investment in sectors under government approval route resulting in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities will be subject to Government approval. Foreign investment in sectors under automatic route but with conditionalities, resulting in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities, will be subject to compliance of such conditionalities,” a ministry of commerce and industry statement said.
All foreign investment already made in accordance with the policy in existence would not require any modification to conform to these amendments. “Portfolio investment allowed up to 49 per cent without government approval or compliance of sectoral conditions will give opportunities to listed Indian firms to raise further capital under the portfolio investment scheme even in the restricted/approval route sectors,” he said.
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,” Devraj Singh, executive director – tax and regulatory services, EY, said.