In a move that will give financial flexibility to Indian companies with foreign investments of up to 49%, the government is all set to do away with the sub-cap restrictions currently prevailing across various sectors. This means investments by foreign institutional investors (FIIs) or foreign direct investment (FDI) can both be allowed without any cap on either.
Currently, such restrictions are imposed in several sectors like direct-to-home (DTH), commodity exchange, stock exchange, credit information companies among others where the overall foreign investment cap is 49% but there are sub-cap restrictions on FDI. For example, in DTH, the FDI component is capped at 20% within the overall permissible foreign investment limit of 49%, while 24% FDI cap exists for commodity exchanges and 23% for credit information companies.
The proposal is intended to improve the availability of funds for Indian companies given that FIIs, traditionally strong investors in the Indian firms, have lately reduced their commitment on the back of higher interest rates compounded by government’s policy paralysis.
Under existing foreign investment regulations, the total holding by all FIIs in an Indian company cannot cross 24% of the paid-up capital of the Indian company. With new FDI regulations in place, FIIs would be able to raise their stakes beyond 24% going up to the FDI cap. This would, of course, require that the target company is listed. But the recommendations would not cover the public sector banking space where policy allows only 20% FII investment and no FDI.
Once the new policy is in place, companies in these sectors will have more flexibility on the nature of foreign investments to be brought in. Also, such companies can opt for either direct equity investments of stakes by portfolio investors. Also, the direct investors would get the opportunity to appoint a director in the investee firm.
However, the companies with FDI and FII investments would require to be owned and controlled by resident Indians, with management control in sectors where foreign is limited to 49%. The foreign companies would continue to seek permission of the foreign investment promotion board (FIPB) if such investments are not on an automatic route.
A similar proposal was recommended in 2004 by the Ashok Lahiri committee, which said, in general, FII investment ceilings be reckoned over and above the prescribed FDI sectoral caps.
Sources said, the various bilateral business councils from the US and European countries have been lobbying for the dilution of FII/FDI limit within the capped foreign investment norms. ?US companies, in particular, have been urging the Indian government to lift these restrictions so as to get a smoother transfer of funds,? said an executive in an industry trade body.
The move will specially help the six-player Indian DTH sector, where the 20% FDI cap has been restrictive to various operators. Rupert Murdoch-backed Star TV and Malaysian investor Astro have already exhausted the 20% FDI cap and therefore have to find indirect routes to continue funding the capital-intensive DTH operations.
