The Centre is considering a major overhaul in the country’s foreign investment policy. According to some key proposals being considered by the finance ministry, apart from according new definitions to FDI and FII, the guidelines for NRIs investing in Indian securities could be eased.
The government is also mulling FDI purchases through stock exchanges, institutionalizing composite foreign investment caps for FDI and FII, defining foreign control, allowing FDI in tobacco sector where the same was banned in 2010 and a special treatment for venture capital funds and ADR/GDRs.
The proposals are part of the presentation made by a group of officers to the committee for rationalising the definition of FDI and FII headed by secretary DEA Arvind Mayaram and comprising chief economic advisor Raghuram Rajan among others.
The committee was set up to clarify the position taken by finance minister P Chidambaram, who in his budget speech said a stake of 10% or less in a company will be treated as FII, and anything more than that will be treated as FDI.
?A lot of clarity has emerged after first meeting of the committee. A detailed set of recommendations on the issues would soon be finalised and presented to the finance minister,? said a government official privy to the committee’s deliberations.
With regard to the treatment of NRIs, the proposal is to bring them on par with other portfolio investors, allowing an NRI to invest up to 10% in any listed Indian firm instead of 5% at present. The thinking is also to increase the aggregate cap of investment by NRIs from 10% to 24% level, the same as that currently applicable for FIIs.
Currently, NRIs are permitted to invest in Indian securities either on repatriable basis or on a non-repatriable basis. All repatriable investments are subject to restrictions such as 5% per investor and 10% aggregate. NRI investments on non-repatriable basis are treated on par with domestic investors with no restrictions.
The committee, in its report, is also expected to seek government approval to remove multiplicity of oversight in case of dealing with FDI and FIIs. While both categories of investments are governed by FEMA, the FDI policy is issued by DIPP whereas FIIs are governed by Sebi regulations.
It is expected that DIPP may be given mantle to look at investment pattern for both.
Sources said the committee is also looking at disallowing FIIs investment in unlisted entities as there is very little investment from the portfolio investor in such companies and that these do not fulfill the portfolio investors’ criterion of liquidity and anonymous dealing.
As of February 2013, FII investment in unlisted entities is miniscule, being R1,214.65 crore, representing 0.16% of the total FII investment of R7,81,918.82 crore.
It may also seek raising the aggregate FII cap in a company from the present 24%. Currently, while the FII aggregate cap is 24%, they are allowed to increase their stake to foreign investment level prescribed for the sector, subject to shareholder approval. If the new proposal is implemented, FIIs can raise their aggregate investment in a listed firm to the sectoral foreign investment limit without shareholder nod.
Portfolio investment in a company is currently allowed up to 44% (FII -24%, QFI 10% and NRI 10%).
Other issues being looked at by the committee are treatment of listed and unlisted securities. The concern here is that an FDI investment should not turn into FII investment on companies turning from unlisted entity to listed ones. Similarly, it is reckoned that additional issue of security by a company should not change investments treated as FDI into FII by virtue of shareholding going down below 10% threshold.
Also, the committee is expected to bring clarity on whether portfolio investment would be included while terming an organisation as foreign-owned or controlled (FOOC). Such companies can undertake downstream investment only in compliance with entry routes conditionalities and caps laid down in the FDI policy.
The committee is also expected to bring clarity on whether or not to allow portfolio investment in prohibited sectors and allow entry of FIIs in tobacco sector.
Issues before the Mayaram committee
* Treat NRIs on par with other portfolio investors
* Raise aggregate investment by NRIs in Indian securities
* Raise aggregate investment by FIIs in Indian securities to the sectoral cap without having to obtain shareholder approval
* Bar FII investment in unlisted entities
* Allow FDI purchase through stock exchanges
* Clarity on including FII investment in calculating foreign owned or controlled (FOOC) status for firms
* Incentivise foreign venture capital investors and treat their investment as FII or FDI
* Remove multiplicity of oversight for FDI and FII investment as both are governed by Fema