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The department of industrial policy and promotion (DIPP) has prepared a draft Cabinet note proposing the limits for foreign direct and portfolio investment be merged into composite caps.
The note has proposed a combined cap in most sectors where foreign direct investment (FDI) is allowed or where foreign institutional investors (FII) have a separate limit. Various government departments have been asked to comment on the note by July 23.
Composite caps have been suggested for sectors like agriculture, tea plantations, petroleum and natural gas, manufacturing, airports, real estate, telecommunications, mining, non-banking financial companies and pharmaceuticals. In some sectors where only FDI and FII investments are allowed now, the department has proposed investments by non-resident Indians and foreign venture capital firms as well. These include 100 per cent foreign investment in asset reconstruction companies, 74 per cent in private banking, 20 per cent in public-sector banks and 49 per cent in power exchanges.
Also included are investments by foreign venture capital firms in insurance and the print media's news & current affairs segment, which were off-limits for them so far.
"Overall, I think there is some clarity. The proposals are categorical that composite caps will be allowed in most sectors, giving clarity to foreign investors," said Dev Raj Singh, executive director, tax & regulatory services, EY.
The department said the proposal would provide Indian companies a wider choice of investors. It rejected the contention that portfolio investments were neither lasting nor intended to control a company. It argued there were cases of companies being controlled by portfolio investors, and hence the need for composite caps.
For instance, the department said, broadcasting carriage services had a sectoral FDI cap of 74 per cent, of which 49 per cent could come through the automatic route. A company, the department pointed out, could simultaneously have 51 per cent FII holding through a special resolution of its general body followed by a board resolution.
The note suggested a composite cap of 51 per cent in multi-brand retail, instead of just FDI.
The Narendra Modi government is opposed to foreign investment in this sector, though it has not clarified whether the policy decision of the United Progressive Alliance government will be reversed. The same cap is proposed for single-brand retail, cash-and-carry wholesale trading and business-to-business e-commerce activities.
FIIs will not be permitted in the defence sector and FDI will be restricted to 26 per cent, the note says. Finance Minister Arun Jaitley had announced in last week's Budget the composite cap for foreign investment in defence was being raised to 49 per cent. "This is an anomaly," Singh pointed out.
The proposals have some exceptions. Currently, power exchanges, infra firms in the securities market, credit information companies and commodity exchanges have sub-limits within an overall cap. Commodity exchanges have a 23 per cent FII limit and a 26 per cent FDI limit. These separate limits will be retained, given the sensitive nature of the financial sector, the department has proposed.
Besides, if FII investment rises beyond 24 per cent in existing drug companies, it will be subject to government approval, as well as certain riders. Clearance will also be needed for Indian companies established with foreign investment and not owned or controlled by a resident entity. For the purpose of control, all forms of foreign investment will be taken into account. Government approval will not be required if the foreign investment permitted is 100 per cent through the automatic route.
FII inflows into India so far this year have stood at $23 billion. The country has also received $24.29 billion worth of FDI over the same period.
DEFINING INVESTMENT
- Common theme: DIPP proposes composite foreign investment cap for a vast range of sectors
- Wide umbrella: The composite cap will include FDI, portfolio investments, investments by NRIs and foreign venture capital investors
- Differential treatment: Commodity exchanges, power exchanges, infrastructure company in the securities market and credit information companies will have separate FII and FDI caps
- Approval needed: The govt's clearance will be required in case an Indian firm is being established with ownership and control vested in foreign entities
- Cap for drug firms: If foreign portfolio investment rises beyond 24% in existing pharma companies, the investment will be subject to government approval and some other riders
