The Government has accepted the report of Mayaram panel related with removing ambiguity in the definition of Foreign Direct Investment (FDI) and Foreign Institutional Investors (FII). Now, regulatory changes will be required to put the new regime in place.
The panel was constituted last year under the Chairmanship of the Economic Affairs Secretary Arvind Mayaram after then Finance Minister P Chidambaram announced in the budget. The Committee, in its report, suggested 10 per cent or more foreign investment in a listed Indian Company should be treated as FDI while below 10 per cent to be considered as Foreign Portfolio Investor (FPI). FPI combines two categories of foreign investors, FII and Qualified Foreign Investor (QFI). The panel also said that for an unlisted company even one dollar worth of foreign investment would be considered as FDI.
The core recommendation of the panel is that it should be the Endeavour to simplify the classification of foreign investment and enable basically two classes of foreign investors in the long run viz. Portfolio Investors and FDI Investors, and at best carve outs therein for NRIs, in view of their special status.
The panel adopted the conceptual framework that FDI is “characterised by a lasting interest i.e. existence of a long term relationship, significant degree of influence. Normally, ownership of 10 per cent or more of the ordinary shares or voting power signifies this relationship and it involves both initial and subsequent transactions.” On the other hand, Portfolio Investment is identified by the largely anonymous relationship between the issuers and holders, and the degree of trading liquidity in the instruments. Further it covers, but is not limited to securities traded on organized or other financial markets, it mentioned.
It has also specified that in a particular company an investor can hold the investment either under FDI or FPI route, but not both.
FDI
It recommended, “Foreign Investment of 10 per cent or more through eligible instruments made in an Indian listed company would be treated as FDI. All existing FDI below the threshold limits made under the FDI route will, however, continue to be treated as FDI.” The Government has provided various limits for FDI in various sectors. For example, FDI limit for multi-brand retails is 51 per cent while for Insurance, it is 26 per cent.
The panel further suggested that investment below 10 per cent as FDI could be possible but only with a caveat that the foreign investment “stake is raised to 10 per cent or beyond within one year from the date of the first purchase.” It also said that the obligation to fulfill that condition would be on the company.
“If the stake is not raised to 10 per cent or above, then the investment will be treated as portfolio investment,” the report said adding that in case an existing FDI falls to a level below 10 per cent, it can continue to be treated as FDI without an obligation to restore it to 10 per cent or more as the original investment was an
FPI
The panel has said that any investment by way of equity shares, compulsory convertible preference shares/debentures less than 10 per cent of the post issue paid up shares of a company will be treated as FPI. At the same time, “investments by foreign investors under private placement of less than 10 per cent of post issue paid up capital will be treated as FPI.”
The panel felt that necessary checks and balances need to be placed to ensure that the FPI do not act in concert or a “single FPI investor does not circumvent the regulator framework by splitting the investment or by acting in concert with other.”
NRI Investment
Regarding NRI investors, the panel said that they have a special place in the foreign investment regime since NRI funds flow even through deposits and remittances. Special privileges are also available to NRIs in terms of the Overseas Citizenship Act and the provision to make ‘non-repatriable’ investments. “This position would remain and to reinforce the same, it may be further examined if non-repatriable investment by an NRI can be treated as “domestic” as also an enabling mechanism to enable such investment to come through via a corporate form,” it suggested.
It also called for a relook at the Foreign Venture Capital Investors (FVCI) scheme since these investors are basically in the nature of FDI.