Composite caps enlarge room for capital inflows

By: | Published: July 17, 2015 1:26 AM

Considerable fresh leeway will now be available to foreign investors, especially portfolio ones, to invest in a whole host of sectors in India...

FDI in IndiaIn the brownfield pharma sector, 100% FDI is allowed but with government approval. From now on, FPI up to 49% would be allowed via the automatic route. (Reuters)

Considerable fresh leeway will now be available to foreign investors, especially portfolio ones, to invest in a whole host of sectors in India, with the Cabinet on Thursday approving a Budget proposal to end the regulatory differentiation among categories of investors. While the new composite-cap policy will supersede sub-limits for foreign direct investment (FDI) and foreign portfolio investment (FPI) wherever those existed, the government has also offered automatic approval for portfolio investments up to 49% in all sectors where the foreign investment cap is at that level or above.

The move, which experts said amounted to extensive streamlining of the FDI policy in one stroke, would make it easier for firms, especially listed ones that are still subject to myriad controls on foreign capital mobilisation, to boost their capital base or replace equity investors.

The sectors to benefit include banking, defence, brownfield pharma, commodity and power exchanges, credit information companies and infrastructure companies in the securities market (such as stock exchanges, depositories and clearing corporations).

For the defence sector, the new policy would mean that FPIs and foreign venture capital funds can invest up to 49% in a firm, compared with 24% earlier. Analysts, however, said in this sector, which is in the focus of the Modi government’s Make in India campaign, FDI would be more relevant in a practical sense as technology assimilation is one objective of higher foreign investment.

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In private-sector banking, FPIs can now invest up to 74% — of which investments up to 49% can be via the automatic route — as against a maximum of 49% earlier through a resolution by its board of directors followed by a special resolution to that effect by its general body. The big gainers of the move could be Axis Bank and Yes Bank. FPI holding in both these banks is now close to 49%. Axis Bank’s board and its shareholders have cleared a proposal to increase the FPI limit to 74% and was reportedly looking at the ADR route. HDFC Bank and ICICI Bank have their foreign holdings nearing 74%.

Vivek Gupta, partner, BMR Advisors, said: ‘For sectors such as banking, where currently portfolio investment was restricted up to 49%, the amendment seems to suggest that the said limit could now be raised up to the overall limit of 74% subject to government approval route for the excess. One would await the DIPP rules language on certain aspects — particularly in relation to the assertion around no need for government approval for transfer of non-controlling stakes.’

Thursday’s Cabinet decision led to a rally in many banking stocks, with some of them hitting lifetime highs. The HDFC Bank scrip closed 1.52% on the BSE while ICICI Bank was up 0.83% on Thursday.

In the brownfield pharma sector, 100% FDI is allowed but with government approval. From now on, FPI up to 49% would be allowed via the automatic route.

Among the other major sectors, multi-brand retail, where 51% FDI is allowed with government approval (this policy has not been implemented due to the lack of a go-ahead from the BJP and its saffron affiliates), theoretically FPI up to 49% can now be allowed via the automatic route.

The government has clarified that any existing foreign investment already made in accordance with the previous policy would not require any modification to conform to these amendments. It also clarified that ‘FCCBs and depository receipts…being in the nature of debt, shall not be treated as foreign investment. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment.’

The introduction of composite caps (doing away with the distinction between foreign direct, portfolio and NRI investments) is in line with norms prevailing in many foreign countries. Devraj Singh, executive director, EY, said: ‘The decision will give a big boost to ease of doing business in India. With this, government has clubbed other investments, like FII/FPI/QFI, etc, along with the foreign direct investment and to be called foreign investment.’
The other conditions that came with the composite cap policy included that total foreign investment, direct and indirect, in an entity should not exceed the sectoral/statutory cap. Also, foreign investment in sectors under the approval (FIPB) route resulting in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities will continue to be through the approval route.

Foreign investment in sectors under automatic route but with conditionalities, resulting in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities, will be subject to compliance of such conditionalities.

The government added that sectors that are already under the 100% automatic route and are without conditionalities would not be affected. Experts said though this would make it theoretically possible for FII/FPIs to hold up to 100% in companies in such sectors, such a situation may not arise in practice.

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