Composite FDI cap to have a positively impact

Sub-limits for portfolio investment go, except in banking and defence

The introduction of composite foreign direct investment (FDI) caps is likely to impact commodity exchanges, credit information companies, power exchanges and infrastructure firms in the securities market such as stock exchanges. They will now have the flexibility to have overseas equity in any form up to the sectoral cap.

These sectors currently have sub-limits within an overall cap. For example, in commodity exchanges the limit for foreign portfolio investment (FPI), including foreign institutional investment (FII), is 23 per cent and for FDI it is 26 per cent. However, after notification of the recent Cabinet decision, up to 49 per cent of any foreign equity will be allowed into the sector. As a result, in this sector the FDI or FII limit will automatically increase to 49 per cent.

The main reason behind  the composite caps was to bring clarity in all types of foreign money coming into the country and check “misuse of the FDI policy”, thereby promoting ease of doing business. As a result, the composite caps would do away with the sub-limits forever, while only the sector cap would be maintained, a senior official in the department of industrial policy & promotion told Business Standard.

However, separate limits for FPI and FDI will remain for banking and defence. As such, FPI could come up to 49 per cent in private banks within the overall sectoral limit of 74 per cent and 24 per cent with the overall cap of 49 per cent in the defence sector. The government is planning to bring in the new FDI policy incorporating these changes by the end of this month.  

The composite cap system will not impact FDI norms in print media, aviation, multi- and single-brand retail trading and telecom services, among others. Sectors that had the stipulated condition of going through the government route at present would remain as they were, the official stated.

For instance, 49 per cent foreign investment can come in through the automatic route in single-brand retail, while permission of the Foreign Investment Promotion Board (FIPB) or the Cabinet Committee on Economic Affairs will be needed beyond that.

“Different categories of caps (FDI, FII or FPI) leads to a situation where the person who is investing is confused or has to do much more due-diligence to see that he does not exceed the limit and the person receiving the investment is also constantly looking at them in terms of am I exceeding the limits... So, it leads to a lot of layered due diligence to be maintained. We thought that it is important to treat all foreign investment with the same kind of parity,” Commerce and Industry Minister Nirmala Sitharaman said here on Friday.

According to experts, the composite caps will lead to greater transparency because the policy has been clearly defined. However, they believe investors will have greater clarity once the changes are notified and the consolidated FDI policy is accordingly amended.

“The new policy is not restrictive. The position under the new guidelines will be either more liberal or, at worst, the same as earlier. All existing investments have been grandfathered with the introduction of composite caps. Wherever there are sectoral caps, those, of course, apply as before,” said Vivek Gupta, partner, BMR Advisors.

Agrees Mehul Modi, senior director, Deloitte India, who called it a “liberal policy” that would now spare international investors of the “hair splitting strategy to define every capital.”

In 2014-2015, FDI inflows stood at $31 billion, surging 27 per cent from $24.29 billion in the previous year. FDI inflows in April jumped a whopping 111 per cent to $3.60 billion from $1.70 billion.