Easing rules might increase short-term flows and volatility

Freeing foreign portfolio investment (FPI) up to 49 per cent across all key sectors, as the government has done, might lead to more flow of short-term money. And, raise the volatility in capital markets, worry some.

However, the government has played down the fears, saying  it would rather curb existing misuse of FPI caps.

The government on Thursday said it had decided to allow  FPI  up to 49 per cent through the automatic route in most sectors. And, all types of foreign investments – FDI, FII, NRI, FVCI, QFI, LLPs and DRs – have been subsumed into a single cap in each sector.

Directly impacted by the liberalisation are expansion in pharmaceuticals, power exchanges, stock exchanges, credit information companies, commodity exchanges, single-brand retail, insurance and pensions, and publication of facsimile editions of foreign newspapers, scientific and technical journals.

The worry, says Dev Raj Singh, executive director (tax and regulatory services), EY, is that, “All these sectors will now see more of speculative investment. The basic nature of FPI is short-term, although it depends on the investors. Now, more and more strategic investors will be looking at India.

The government chose to keep sectors such as defence and private banking out of the change, pointing to their strategic and sensitive nature.

After the Cabinet Committee on Economic Affairs gave its nod, commerce and industry minister Nirmala Sitharaman had said the government did not want “fly-by-night operators or quick money” coming in or going out. Which, said Singh, was an admission that more leeway to FPIs is tantamount to encouraging of temporary money.

“The move taken by the government will certainly result in overseas investments swelling but the capital markets will certainly become more sensitive due to this. FPI is nothing but volatile money. FPI money is not long-term money, which might or might not help the government in achieving its larger objective of increasing foreign investments,” said Punit Shah, partner, Dhruva Advisors LLP.

A key government official, however, said the FPI caps are being misused currently. The company's were increasing FPI by passing board resolution once it reaches 24 per cent and were raising it till beyond FPI caps.  Now, this practice will be curbed as beyond 49 per cent FPI, the  government approval will be needed in many a sectors, he clarified.

Foreign direct investment inflow in the first two months of the current financial year (starting April 1) rose 40 per cent to $7.45 billion (nearly Rs 48,000 crore) from $5.3 bn (nearly Rs 34,000 crore) in the corresponding period of 2014.
MONEY WORRY

• Govt allows automatic FPI up to 49 per cent in most sectors
• Experts fear it would lead to speculative money coming into these sectors rather than long-term FDI
• Govt, however, says it would  curb existing misuse  of FPI caps