To further simplify the foreign investment regime, the Centre has decided to club all categories of overseas inflows into one ‘composite’ structure.
Composite means the inflows can either be fully in the form of FDI (Foreign Direct Investments) or FPI (Foreign Portfolio Investments).
Briefing media persons on the Cabinet decision, Finance Minister Arun Jaitley said the Commerce and Industry Ministry’s proposal to introduce the new concept to ease the foreign investment process, which will benefit credit information firms and other market infrastructure institutions such as commodity and power exchanges, has been approved. These sectors can bring in investments either as FDI or FPI up to the composite cap. The prescribed sectoral limit, however, remains unchanged.
As FDI, equity can be bought directly into a company, while in the case of FPI, the equity is purchased from a stock market, and the money does not go into the company. In FPI, the shareholder, in his/her personal capacity, gets the money.
Status quo for bank, defence Following the decision on composite cap, there will be no individual sub-limit in various approved sectors barring two.
A senior government official clarified that two sectors, banking and Defence, will continue to have individual sub-limits. The sectoral cap in private banks is 74 per cent where the FPI limit is 49 per cent. This will continue.
Similarly, normal sectoral cap in Defence is 49 per cent with an FPI limit of 24 per cent. This has not been changed.
Mehul Modi, Senior Director with Deloitte, said that portfolio investment up to the aggregate FDI level of 49 per cent will be permitted without government approval or compliance of sectoral conditions if such investment does not result in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities.
“This relaxation means that foreign investment without government approval is permitted up to 49 per cent under the portfolio route in sectors with a lower FDI cap (say, 26 per cent) and/or requiring government approval,” he said.
Terming the decision as a positive, Vivek Gupta, Partner with BMR Advisors, said that there is a clear forward movement on clubbing of categories of foreign investments.
“It also appears that the Government has been mindful of grandfathering existing investments made, especially in sectors where, under the current ‘non-composite regime’, FDI is prohibited or capped even as FII investment is permitted,” he said.