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Investments below 10% likely to get FDI tag in move to encourage inflows

Jul 30 2013, 14:44 IST
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SummaryThe idea is to make it easier for foreign firms to invest.

The government may allow foreign investment of less than 10% in a company to be treated as foreign direct investment (FDI), albeit with a few conditions, reports Kirtika Suneja in New Delhi. A discussion paper, based on inter-ministerial consultations, that seeks to redefine FDI and foreign institutional investment (FII) notes that “investors with a long-term view can invest below 10% even under the FDI route subject to the condition that the stake will be raised to 10% or more in a prescribed period.” The idea is to make it easier for foreign firms to invest, thereby attracting stable foreign direct flows.

In his Budget speech for 2013-14, finance minister P Chidambaram had observed that investors holding less than 10% share in a company would be treated as FIIs (foreign institutional investors) while any investment more than 10% would qualify as FDI. In April, an eight member inter-ministerial committee under DEA secretary Arvind Mayaram was set up to clearly define

the two kinds of foreign investment.

While FIIs cannot appoint board directors — though they enjoy voting rights in proportion to their stake in the firm — a strategic purchase through an FDI allows the investor to appoint a director on the firm’s board.

“With an FII investment, one can only become an ordinary shareholder but with a strategic sale through FDI, one can get a say in the management and a place on the board of the company. FDI is a long-term investment,” said a DIPP official.

FDI is allowed in various sectors subject to caps; for instance, in the telecom space, there is no cap on FDI while in multi-brand retail, it is restricted to 51%. The rules for approval, whether the automatic route or via the FIPB route, vary from sector to sector.

An FII may invest in the capital of an Indian company under the portfolio investment scheme, which limits the individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company. This aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling, as applicable, by the company concerned through a resolution by its board of directors, followed by a special resolution to that effect by its general body and subject to prior intimation to the Reserve Bank of India (RBI).

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