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Merging of caps will give more headroom to foreign investors

Bank, defense stock likely to be biggest beneficiaries

Sneha Padiyath & Samie Modak  |  Mumbai 

The proposal to have a composite cap for foreign investors is likely to give more room for foreign portfolio investments in India. According to experts, the move to do way with separate foreign portfolio investment (FPI) and foreign direct investment (FDI) caps will create headroom and flexibility for overseas investors.

Currently, many sectors including banks and exchanges have sub-limits or separate caps for FPIs and FDIs. This restricts overseas investments in a lot of stocks because usually, the FDI limit remains under-utilised and the FPI portion gets exhausted..

Read our full coverage on Union Budget Analysts are of the opinion that banking, infrastructure, defence, ports and exchanges are likely to be the main beneficiaries of the move to have composite caps. For instance, the upper limit for foreign investment in banks is set at 74 per cent, while FPIs have a sub-limit of 49 per cent. The defence sector has a 26 per cent foreign investment limit, but FPIs are currently not permitted to invest in the sector. According to experts, the shares of listed companies in this space might appreciate once the Finance Bill gets notified.

“This (merging of investment classes) is a welcome move, as it provides greater flexibility for stakeholders to structure foreign investment and it may create further investment headroom for specific category of investors,” said leading corporate law firm Nishith Desai in a note.

In the past two years, robust foreign flows into the Indian stock market have seen FPI investment hit the ceiling in a number of companies. The removal of sub-limits is expected to be a booster for these companies as it will lead to renewed FPI interest in these stocks and help them raise capital.

FPIs have invested $20 billion into the Indian stock market since January last year.

“It structurally simplifies the investments for these stocks. This could be a trigger for the stocks to move up because of the extra headroom now available for foreign investors to buy into these stocks,” said Nikhil Gholani, head of institutional equity at Tata Capital.

Shares of Axis Bank and YES Bank already saw a huge spurt on Saturday after Finance Minister Arun Jaitley said in his speech: “I propose to do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps.”

Banking stocks have rallied first as they remain FPI favourites. However, other companies where foreign investment is restrained currently could be the next to rally.

“In the defence sector, investment by FPIs is currently not permitted. Once the Bill has been notified, FPIs would be able to utilise the 26 per cent foreign investment limit currently reserved only for FDI investors,” added the note by Nishith Desai.

“A lot of Indian companies have seen expulsion from global indices such as MSCI due to lack of further room for FII investment. Once more limits get freed up, these companies could once again get reinstated, which will automatically lead to a lot of passive flows,” said an analyst with a foreign brokerage who did not wish to be named.

If FPI investments near the prescribed limits, companies have to approach the Reserve Bank of India (RBI), which regulates foreign capital flows in listed companies. Some of the companies that have in the past two years approached for an increase in FII limits include Titan Industries, Lupin, Tata Motors DVR, Strides Arcolab, Tech Mahindra, HDFC Bank, South Indian Bank, and Kotak Mahindra Bank.

“The impact will be the most on banking sector stocks, particularly the private sector where they have been increasing exposure. And since this would increase the free-float, chances of these stocks getting into the MSCI indices are also higher,” said Rikesh Parikh, vice-president (equities) at Motilal Oswal Securities.


  • FII, FDI categories to be merged into a composite cap
  • Move to create more headroom for foreign investments
  • Bank, defence, port, exchanges limit FPI investments
  • Stocks in these sectors could see buying interest
  • Move will help cos raise capital, gain weight in global indices

First Published: Mon, March 02 2015. 00:45 IST