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Government simplifies foreign investment rules with composite FII, FDI cap
Reuters | Photo Credit: Arun Jaitley

The Cabinet Committee on Economic Affairs has introduced a concept to simplify foreign investment norms by clubbing all investments as part of a composite sectoral ceiling.

The proposal for a composite cap of foreign investments in a sector has been mooted before but its implementation was pending.

The decision to approve composite caps will not only simplify the system but also bring in greater amount of transparency. Critics of the move have been voicing their concerns saying this would lead to more 'hot' money or portfolio investment flow into the country against long-term foreign direct investment (FDI).

The move essentially allows portfolio investors or foreign institutional investors (FIIs) to invest more in Indian companies. Currently the Portfolio Investment Scheme limits the individual holding of an FII/FPI below 10 per cent of the capital of the company and the aggregate limit for all such FII/FPI to 24 per cent of the capital of the company.

This aggregate limit of 24 per cent can be increased to the sectoral cap/statutory ceiling, as applicable, by the Indian company concerned through a board resolution followed by a special resolution by its general body and subject to prior intimation to RBI. The aggregate FII/FPI investment, individually or in conjunction with other kinds of foreign investment will not exceed sectoral/statutory cap.

The government has clarified that foreign investment shall include all types of foreign investments, direct and indirect, regardless of whether the said investments have been made under FDI, FII or FPI, NRI and FVCI route. However, FCCBs and depository receipts having underlying instruments which can be issued, being in the nature of debt, shall not be treated as foreign investment.

The sectors which are already under 100 per cent automatic route and are without conditionalities would not be affected.

While the new rules make India an attractive destination, the government will have to do much more in order to show that it means business. It is necessary for the Prime Minister Narendra Modi-led government to pass key reforms on land, labour and taxation in the monsoon session to keep investor interest alive.

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