Volatility in investments concern for RBI.
The Department of Economic Affairs, the Ministry of Commerce and Industry and the Reserve Bank of India have come to a consensus that foreign institutional investment (FII) in a company should be monitored on a monthly or a quarterly basis to ensure there is no breach of sectoral caps under the proposed foreign direct investment (FDI) guidelines.
The commerce and industry ministry had mooted a proposal to revisit the existing guidelines a few months ago based on the principle that sectoral caps should be composite, covering all kinds of foreign investments that include FIIs, NRIs, ADRs, GDRs, foreign currency convertible bonds and convertible preference shares, and there should not be any sub-caps for each of them.
| MONEY MATTERS |
| PLAN: FII in a company be monitored monthly/quarterly |
| TARGET: Prevent breach in sectoral caps under proposed FDI guidelines |
| RULE: Under current policy, total FII holding in Indian company not permitted to cross 24 per cent of paid-up capital |
| FEAR: Volatile FII investments can lead to temporary breach of FDI sectoral cap & 51% foreign holding limit |
| CONSEQUENCE: Change of ownership as per Press Note 2 of 2009, under which an Indian company can turn into foreign entity |
| SCENARIO: Net FII investment $10 bn in first six months (April-Sept) of 2009-10 |
| * Major portion of it through primary market, rather than secondary markets |
| * In calendar 2009, FII net investment in Indian equities crossed $8 bn-mark — a first this year |
| * Foreigners bought stocks worth $274 mn on Aug 28, 2009 |
Under the current policy, the total holding of FIIs in an Indian company is not permitted to exceed 24 per cent of the paid-up capital. However, this limit can be increased to the sectoral cap limit by passing a resolution at the AGM of the company. The proposal is expected to come up for discussions with the Committee of Secretaries after which it would be referred to the Cabinet Committee on Economic Affairs for final endorsement.
Questions were raised on an initial proposal by the commerce and industry ministry that March 31 be fixed as the prescribed date for calculation of foreign investment as it was not feasible to monitor FII investments on a day-to-day basis.
The RBI pointed out that FII investments were volatile in nature and were easily influenced by general market conditions. There would, therefore, be instances of FII holdings leading to temporary breach of not only the FDI sectoral cap but also the 51 per cent foreign holding limit, resulting in change of ownership as per Press Note 2 of 2009, under which an Indian company could become a foreign entity. This, RBI said, “can give rise to arbitrage opportunities in the banking sector or other sensitive sectors where the ownership aspect can be circumvented easily by dynamically changing the FII holding on March 31 and allowing it to exceed in an unrestrained manner on other occasions”.
RBI suggested a “more frequent monitoring of FII holdings — monthly or quarterly” for more realistic calculation of foreign investments. The Department of Economic Affairs endorsed the RBI view. The commerce and industry ministry, taking cognisance of the view of the two agencies, said “a mechanism has to be devised jointly to address the issue of calculation and enforcement periodicity” in the matter.