For years, the 24% cap on FII investment in a company was a hotly contested issue in the Indian stock markets. Last week, caps under the RBI-managed portfolio investment scheme have become another casualty of the meltdown.
In the space of one week, RBI has issued several unusual press notices permitting FIIs to increase their investment in blue chip companies like Grasim Industries and Tata Steel. Some of the other companies where RBI has allowed FIIs to buy shares as the FII holding had fallen below the trigger are Kalindee Nirman (Engineers) India, Ganesh Housing Corporation, Micro Technologies (India) and even in Andhra Bank.
This means the maximum permissible shareholding by FIIs in these companies has become irrelevant in the large-scale exodus of capital. This could have an implication on the shareholding pattern of several significant listed companies. In the current year itself, FIIs have been net sellers to the extent of $13.3 billion.
The immediate pressure on the promoters would be to buy back those shares. Incidentally, RBI has informed corporate India that it would encourage the promoters to buy back shares at discounted prices.
At the moment, FIIs are choosy, and prefer to keep their investments in large-cap stocks that are liquid and have a small impact cost. The impact cost is measured as the movement in the share price, up or down, that is caused when a large buyer or seller transacts on the exchange. Hence, around 40 stocks comprise 75% of the FII portfolio, including companies like Reliance Industries, Infosys and ICICI Bank.
Under the portfolio investment scheme (PIS), FIIs, non-resident Indians (NRIs), and persons of Indian origin (PIOs) are allowed to invest in the primary and secondary capital markets in India. The ceiling for overall investment for FIIs is 24% of the paid-up capital of the Indian company and 10% for NRIs/PIOs. The limit is 20% of the paid-up capital in the case of public sector banks, including the State Bank of India.
The ceiling of 24% for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. And the ceiling of 10% for NRIs/PIOs can be raised to 24% subject to the approval of the general body of the company passing a resolution to that effect.