Composite cap on FDI creates confusion over FII limit in banks

By: | Published: July 17, 2015 3:40 AM

Government's decision to introduce composite caps on foreign investment has led to confusion among bankers who say overseas portfolio investments...

Government’s decision to introduce composite caps on foreign investment has led to confusion among bankers who say overseas portfolio investments can now go up to 74 per cent as against the current ceiling of 49 per cent.

Commerce and Industry Ministry officials insist however that though all foreign investments like FIIs and FDI are being clubbed for limiting the sectoral cap, its applicability on FII investment in banking would be subject to sectoral caps.

While total foreign investment allowed in banking sector is up to 74 per cent, foreign institutional investors (FIIs) are limited to take only 49 per cent.

Officials said this distinction will continue despite the introduction of sectoral composite caps.

FII investment cannot be allowed beyond the current limit of 49 per cent for the fear of run on the bank in case foreign portfolio investors suddenly pull out, the official said, adding that it would also apply to the sensitive defence sector.

While FDI up to 49 per cent is allowed in defence, the FII investment can be only up to 24 per cent.

Introduction of the composite caps on foreign investment, which were approved by the Cabinet today, mean the government would not distinguish between various forms of foreign investments up to the sectoral caps.

Yes Bank Managing Director Rana Kapoor said the decision will help in substantially increasing FII holding in the bank.

“Currently our FII holding is below 49 per cent. Therefore from Yes Bank’s capital raising perspective we now have head room to substantially increase the FII holding, given intensive FII interest in Yes Bank in the past. This will enhance flexibility of various capital raising options including ADR or QIP plans,” he said.

Tax experts too presented an unclear picture with BMR Advisors saying that they would await for the fine print with regard to the modification of the foreign investment norms.

“For sectors such as banking, where currently portfolio investment was restricted up to 49 per cent, the amendment seems to suggest that the said limit could now be raised up to the overall limit of 74 per cent subject to government approval route for the excess,” BMR Advisors said in a statement.

It further said that one would have to wait for the DIPP rules language on certain aspects.

According to analysts, with today’s Cabinet decision, the 49 per cent for FIIs’ cap will go up as the classification of foreign direct investment (FDI) and FII becomes fungible.

However, the decision will not benefit those private sector banks which already are close to 74 per cent ceiling such as HDFC Bank and ICICI Bank.

Welcoming the decision, Kapoor said: “Approval of Composite FDI Cap, while may appear procedural, is a significant reform for the economy as a whole as there will be more capital flowing into the system and significantly easing the procedural investment decisions by foreign investors.”

For the banking sector in particular, as also for Yes Bank it is a great development, he said.

Yes Bank has already got board approval in April 2015 and an enabling approval from shareholders for increasing the FII limit up to 74 per cent in the AGM in June 2015.

According to a senior official of another private sector, this would lead to further foreign investment in the banks and help them in meeting growth capital requirement.

According to Ernst & Young, sectors such as defence, banking, power exchanges, credit information companies will benefit from this policy as earlier there was inter-se cap for portfolio and FDI investment within overall sectoral cap.

“Further, with the portfolio investment allowed up to 49 per cent (no change in the ownership and/ or control to non-resident) without government approval or compliance of sectoral conditions, will give opportunities to listed Indian companies to raise further capital under the portfolio investment scheme even in the restricted or approval route sectors,” it said.

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