Defence, banking out of composite FDI caps to avoid 'quick money'

Presently, in the defence sector FDI limit 49%

The government on Monday clarified it had deliberately kept the defence and banking sectors out of the purview of composite foreign investment caps to avoid “fly-by-night operators” and “quick money” entering these sensitive sectors. “In defence, as regards the cap which prevailed for foreign portfolio investment (FPI) and in banking, particularly private sector banking, those specific sub-caps will prevail. We do not want fly-by-night operators or quick money coming in or going on in such sensitive sectors,” Commerce & Industry Minister Nirmala Sitharaman said on the sidelines of an event by FICCI here on Monday. Last week, the Cabinet Committee on Economic Affairs approved the long-pending demand of international investors of subsuming all types of foreign investments into a single sectoral limit, wherever they are applicable.

At present, in the defence sector, foreign investment limit of 49 per cent is allowed under the automatic route. For investment proposals above 49 per cent, permission by the Cabinet Committee on Securities (CCS) on a case-to-case basis will be required.

However, in the defence sector, portfolio investments such as FPIs, only up to 24 per cent will be allowed under the automatic route. Even NRI investment is capped at this limit.

Similarly, in private sector banking, the FPI limit is 49 per cent. There were widespread speculations last week that overseas portfolio investments can go up to 74 per cent with composite caps kicking in.

According to the extant policy, the aggregate foreign investment in a private bank from all sources will be allowed up to a maximum of 74 per cent of the paid up capital of the bank, within which there is sub-cap for FPIs. At all times, at least 26 per cent of the paid up capital will have to be held by residents, except in regard to a wholly-owned subsidiary of a foreign bank.

Sectors that will be able to take advantage of composite caps are commodity exchanges, credit information companies, power exchanges and infrastructure firms in the securities market such as stock exchanges.

These sectors currently have sub-limits within an overall cap. For example, in commodity exchanges, the limit for FPI, including foreign institutional investment (FII), is 23 per cent, and for foreign direct investment (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, foreign investment limit, comprising FDI and FPI, will automatically increase to 49 per cent.

Addressing a seminar on intellectual property rights (IPR), Sitharaman stated that the government is working aggressively to roll out the National IPR Policy that is currently under inter-ministerial consultation.

The government is also working on bringing interest subvention for exporters to help them face global demand slowdown. The previous scheme of three per cent subvention expired on March 31, 2014. Exports declined for seven months in a row in June. The three per cent subvention would make cost of credit for micro, small and medium scale exporters come down to 9-10 per cent from existing 12-13 per cent. producers from relevant authorities of central and state governments’.

It would also meet regularly to monitor the facilitation process and issue directions to the authorities concerned.