The government is likely to exempt foreign institutional investors (FIIs) from seeking its approval each time they decide to pick up stakes in any Indian company, provided the composite foreign investment cap is not breached. This would effectively mean differential treatment to FDI and FII investments in sectors where the approval of the Foreign Investment Promotion Board (FIPB) is required.
The development comes with the finance ministry objecting to the DIPP?s current policy of clubbing FII and FDI investments as it feels this would restrict FII inflows into the country.
Once the FII investment is de-linked from FDI, it would work like this: Currently the FDI cap in the telecom sector is 74%. Foreign investments up to 49% is allowed via the automatic route but beyond this, an FIPB approval is required. Once the new norms come into effect, FDI would continue to require prior approval while FII investments would not.
The finance ministry feels that foreign funds are primarily financial investors, rather than strategic ones. They have no major interest in the day-to-day running of the company and do not have representation on the board of directors and, therefore, need not be subject to same conditionalities as investors coming via the FDI route.
Earlier, under the Reserve Bank of India?s (RBI) portfolio investment scheme, registered FIIs had been allowed to trade on the bourses without seeking any approval from the government. However, this changed once the government came out with the new FDI policy guidelines in February, 2009.
In practice, FIIs have been buying and selling shares in sectors like telecom, where FDI needs approval, even after February?s revised norms.
The new norms club all foreign investments such as FIIs, global depository receipts, American depository receipts and foreign currency convertible bonds together. The finance ministry had told the DIPP ? the agency that formulates foreign investment policies ? that subjecting FII investments to FIPB nod would be adding to red tapism.