India tweaks its Foreign Direct Investment rules

India tweaks its Foreign Direct Investment rules
India tweaks its Foreign Direct Investment rules

PerformanceGurus Staff

New Delhi

Barring Banking and Defense sectors, the Government of India has decided to have a composite cap for all forms of foreign investment, including Foreign direct investment (FDI), Foreign institutional investment (FII) and Foreign portfolio investment (FPI). The decision taken in the Union Cabinet meeting on July 15  will simplify the process of foreign investment and ease regularity hurdles.

In simpler terms, the decision will mean removal of separate upper limit for FDI, FII and FPI, and replacing them with a single cap. However, the Government has decided to maintain foreign investment caps in the banking and defense sectors.

An official of the Commerce ministry said that the FII investment cannot be allowed to go beyond the current limit of 49%  in banking sectors as a safeguard measure to preempt any major crisis in case foreign portfolio investors suddenly pull out. Similar safeguards will remain in place in the defense sector also, he said.

Total permissible foreign investment in banking sector stands at a maximum of to 74%, but FIIs can raise their stakes only up to 49%. In defense, FDI is allowed up to 49% and there is cap of 24% on  FII investment .

Finance Minister Arun Jaitley said  that the concept of composite caps has been introduced for simplification of foreign investment norms:

 “From now onwards, all FIIs, NRIs and other foreign investments will be clubbed.   It will be constituted as a composite cap,”

– Arun Jaitley talking to reporters after the Cabinet meeting. The meeting was  chaired by Prime Minister Narendra Modi.

Reacting to the  decisions, Yes Bank Managing Director Rana Kapoor said it  will help in  increasing the FII holding in the banks. “Currently our FII holding is below 49%. Therefore from Yes Bank’s capital raising perspective we now have head room to substantially increase the FII holding, given intensive FII interest in Yes Bank in the past. This will enhance flexibility of various capital raising options including ADR or QIP plans,” he said.

However,  after the Cabinet meeting the  government  said the investments made through Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts (DRs) would not be treated as foreign investment unless the debt is converted into equity.

In 2014-15, FII investment  went up by seven times to USD 40.92 billion and  FDI grew by 27% to USD 30.93 billions…

During the fourteen months in office, the Modi government has taken a series of steps to increase foreign investment in India. In Defense , the  cap was raised to 49% from 24% while the entire range of rail infrastructure was opened for  100% FDI investment. Similarly, the FDI limit in insurance sector has been raised to 49% to attack foreign investment.  To boost infrastructure creation, the Government has also reviewed the FDI policy in construction sector by creating easy exit norms, rationalizing area restrictions and providing due emphasis to affordable housing.

Following is from a release issue by the Government on  amendments to the relevant paragraphs of Consolidated FDI policy.

(a) Para 3.1.4 (i): An FII/FPI/QFI (Schedule 2, 2A and 8 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, as the case may be) may invest in the capital of an Indian company under the Portfolio Investment Scheme which limits the individual holding of an FII/FPI/QFI below 10% of the capital of the company and the aggregate limit for FII/FPI/QFI investment to 24% of the capital of the company. This aggregate limit of 24% can be increased to the sectoral cap/ statutory ceiling, as applicable, by the Indian company concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body and subject to prior intimation to RBI. The aggregate FII/FPI/QFI investment, individually or in conjunction with other kinds of foreign investment will not exceed sectoral/ statutory cap.

(b) Para 3.6.2 (vi): It is also clarified that Foreign investment shall include all types of foreign investments, direct and indirect, regardless of whether the said investments have been made under Schedule 1 (FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 8 (QFI), 9 (LLPs) and 10 (DRs) of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations. FCCBs and DRs having underlying of instruments which can be issued under Schedule 5, being in the nature of debt, shall not be treated as foreign investment. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment.

(c) Para 4.1.2: For the purpose of computation of indirect foreign investment, foreign investment in an Indian company shall include all types of foreign investments regardless of whether the said investments have been made under Schedule 1 (FDI), 2 (FII holding as on March 31), 2A (FPI holding as on March 31), 3 (NRI), 6 (FVCI), 8 (QFI holding as on March 31), 9 (LLPs) and 10 (DRs) of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations. FCCBs and DRs having underlying of instruments which can be issued under Schedule 5, being in the nature of debt, shall not be treated as foreign investment. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment.

(d) Para 6.2:

(i)   In the sectors/activities mentioned in this paragraph, foreign investment up to the limit indicated against each sector/activity is allowed, subject to the conditions of the extant policy on specified sectors and applicable laws/regulations; security  and other conditionalities. In sectors/activities not listed therein, foreign investment is permitted up to 100% on the automatic route, subject to applicable laws/regulations; security and other conditionalities.

Wherever there is a requirement of minimum capitalization, it shall include share premium received along with the face value of the share, only when it is received by the company upon issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue transfer of shares beyond the issue price of the share, cannot be taken into account while calculating minimum capitalization requirement.

(ii)   Sectoral cap that is to say the maximum amount which can be invested by foreign investor, unless provided otherwise, is composite and includes all types of foreign investments, direct and indirect, regardless of whether the said investments have been made under Schedule 1 (FDI), 2 (FII), 2A (FPI), 3 (NRI), 6 (FVCI), 8 (QFI), 9 (LLPs) and 10 (DRs) of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations. FCCBs and DRs having underlying of instruments which can be issued under Schedule 5, being in the nature of debt, shall not be treated as foreign investment. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment under the composite cap.

(iii) Foreign investment in sectors under Government approval route resulting in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities will be subject to Government approval. Foreign investment in sectors under automatic route but with conditionalities, resulting in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities, will be subject to compliance of such conditionalities.

(iv) The sectors which are already under 100% automatic route and are without conditionalities would not be affected.

(v) Notwithstanding anything contained in paragraphs (i) and (iii) above  portfolio investment, up to aggregate foreign investment level of 49%, will not be subject to either government approval or compliance of sectoral conditions, as the case may be, if such investment does not result in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities,

(vi) Total foreign investment, direct and indirect, in an entity will not exceed the sectoral/statutory cap.

(vii) Any existing foreign investment already made in accordance with the policy in existence would not require any modification to conform to these amendments.

(viii) The onus of compliance of above provisions will be on the investee company.

 

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