Foreign Institutional investors can now keep small change. The government is planning to write in a trigger mechanism that will free FIIs from hassles if their investments breach any sector-specific foreign direct investment cap by less than 1%.
This means FIIs will have to report to the Reserve Bank of India any violation of sectoral caps only when their investments in Indian companies cross FDI limits.
The mechanism could ease business rules significantly for both FIIs and Indian companies. They have to keep a close watch on transactions in the equity markets to ensure that there is no breach of sectoral caps. This is often difficult to sift from the aggregate volume of share transactions in any company on a daily basis.
According to government sources, the new rules will consider any share purchased by an FII through the stock market as FDI only if such a purchase constitutes more than 1% of the total equity of a company. In addition, FIIs will be asked to provide the details of the beneficial owners.
But FII investments will not be counted daily for this purpose. Instead, the government will consider shareholdings on March 31 to determine holding patterns.
The government?s plans will benefit sectors like new media, telecom, aviation, insurance and banking.
These sectors allow different combinations of FIIs and FDI to determine the sectoral cap.
Officials say, a final call will be taken in consultation with the RBI after freezing a policy on the direct and indirect holding issues in banks.
A host of media companies had asked the government for clarification as early as 2003, to ascertain the status of stock market holdings in companies post- listing.
At that time, the government had said any FII holding in a listed news company would not be permitted over and above the sectoral cap of 26% and that, any the government be informed of any shareholding change.
On their part, companies had told the government that it would be difficult to keep track of the stock market daily.
Subsequently, the government clarified that companies did not have to count FII holdings daily to determine stakes.
The RBI tracks the ceiling on FII investments in domestic companies daily. For effective monitoring of foreign investments, the RBI has set a threshold?two percentage points lower than the actual ceilings. FIIs can invest up to 24% in any listed firm and up to 49% through a special resolution of the board of a company.
When the aggregate net purchases of equity shares of a company by an FII reaches a critical level, the RBI cautions all designated bank branches not to purchase any more equity shares of that firm on behalf of the investor without its approval.
