Private placements may get FDI tag even if below 10% threshold

Written by Arup Roychoudhury | Kirtika Suneja | New Delhi | Updated: Nov 28 2013, 17:28pm hrs
FDI IndiaA finance ministry official told FE that all aspects of foreign investment were being discussed. Reuters
The government and RBI may allow a couple of exceptions to the proposed rule that investment below 10% cant be counted as foreign direct investment (FDI).

In his budget speech last February, finance minister P. Chidambaram said any foreign investment above 10% would be considered FDI and anything below that treated as FII.

According to sources, the finance ministry, which is fine-tuning the new norms as per the Mayaram panel recommendations, is likely to treat investment by foreign investors through the private placement/arrangement route as FDI irrespective of the threshold limit.

Moreover, any stake reduced to 10% due to sale of shares by a foreign investor will continue to be treated as FDI provided the government is satisfied that the investment is of a long-term nature, the sources added.

"Private placement is usually strategic in nature and hence long term. Moreover, it does not happen through the stock exchanges and does not have the character of a portfolio investment," said Akash Gupt, executive director, regulatory services, at PwC.

By merging FIIs, sub accounts and QFIs to create a new category called foreign portfolio investors (FPIs), the new rules would attempt to reduce the complexities of investing in India.

A finance ministry official told FE that all aspects of foreign investment were being discussed and that the final definitions should be out soon. This is not easy. We will reach some clarity soon. For now, all the concerned stakeholders are having a lot of discussions but we haven't yet reached an agreement.

Economic affairs secretary Arvind Mayaram recently said that the final details on various investor classes will be decided upon in a week or two.

The Mayaram panel will draw heavily from the recommendations made by a Sebi panel headed by former cabinet secretary KM Chandrashekhar.

Some of the suggestions of the Chandrashekhar panel include merging existing FIIs, sub accounts and qualified foreign investors (QFI) to be merged into the new FPI investor class with an aggregate investment limit of 24%. Essentially, FII is likely to be abolished as an investor class.

Besides, sources said, portfolio investment by a single investor up to 10% in initial public offerings, follow-on public offerings and qualified institutional placement in a listed company may also come under FPI, a suggestion not initially made by the Chandrasekhar panel.

Sources said the Mayaram panel, of which RBI deputy governor HR Khan is also a part, is expected to keep the classifications of non-resident Indians (NRI) and person of Indian origin (PIO) investment groups unchanged.

NRIs/PIOs will continue to be viewed as a distinct market participant enjoying certain privileges in terms of investment permissions not available to foreign investors and will continue to have an aggregate investment limit of 10%.