India simplifies foreign investment rules, banks to benefit

NEW DELHI (Reuters) - India has simplified rules for foreign investment in companies by clubbing together different categories, Finance Minister Arun Jaitley said on Thursday, clearing the way for private sector banks to raise fresh capital.

The move, flagged by Jaitley in his February budget, lifted shares in lenders like Yes Bank , Axis Bank and Kotak Mahindra Bank , which will find it easier to attract foreign capital up to a 74 percent cap.

Yes Bank CEO Rana Kapoor called the move "a significant reform for the economy as a whole" that would boost capital flows and ease investment decisions.

"This will enhance flexibility of various capital raising options," he said in a statement. Yes Bank, India's No.5 private sector lender by assets, plans to raise as much as $1 billion by selling shares to local or foreign investors.

India's dominant state banks are hobbled by bad loans and need to raise tens of billions of dollars in capital to meet prudential norms. The private sector is more dynamic, but a lower cap on foreign portfolio investment had made it difficult for some to raise capital.

"One of the most important decisions in relation to the investment is the introduction of composite caps for simplification of foreign direct investments," Jaitley told reporters after a cabinet meeting.

Jaitley said foreign direct investment, foreign portfolio investment and investments by non-resident Indians would be "clubbed together under a composite cap".

Previously, foreign capital had been subject to varying restrictions - a legacy of India's socialist past and its lingering reluctance to allow capital to move freely across its borders.

The Department of Industrial Policy and Promotion (DIPP), part of the Commerce Ministry, proposed simplifying the investment rules after Prime Minister Narendra Modi won an election last year by pledging to boost investment and jobs.

For banks, the shift will lead to an increase in their effective free float - or the number of shares that can be easily traded. That in turn would lead to an increase in their weighting in benchmark indexes tracked by many fund investors.

India has also allowed 100 percent investment in pharmaceuticals and railway infrastructure under a so-called automatic route that does not require official approvals.

Sectoral foreign investment caps have been raised in the insurance and defence sectors to 49 percent. No major deals have yet been announced, however, reflecting a lack of clarity over how India treats different types of capital.

(Reporting by Douglas Busvine and Devidutta Tripathy; Editing by Simon Cameron-Moore)