Composite foreign investment caps in Cabinet today

The Cabinet is likely to consider a proposal on Thursday to merge limits of foreign direct and portfolio investments into composite caps to make foreign investment regime easier.

The department of industrial policy and promotion (DIPP) had prepared a Cabinet note proposing a combined cap in most sectors where foreign direct investment (FDI) is allowed or where foreign institutional investors (FII) have a separate limit.

Composite caps have been suggested for sectors like agriculture, tea plantations, petroleum and natural gas, manufacturing, airports, real estate, telecommunications, mining, non-banking financial companies and pharmaceuticals.

In some sectors where only FDI and FII investments are allowed now, the department has proposed investments by non-resident Indians and foreign venture capital firms as well. These include up to 100 per cent foreign investment in asset reconstruction companies, 74 per cent in private banking, 20 per cent in public-sector banks and 49 per cent in power exchanges.

The department is of the view that the proposal would provide Indian companies a wider choice of investors. The proposal rejected the contention that portfolio investments were neither lasting nor intended to control a company. It argued there were cases of companies being controlled by portfolio investors, and hence the need for composite caps.

For instance, broadcasting carriage services had a sectoral FDI cap of 74 per cent, of which 49 per cent could come through the automatic route.

A company, the proposal pointed out, could simultaneously have 51 per cent FII holding through a special resolution of its general body followed by a board resolution.

The proposals have some exceptions. Currently, power exchanges, infra firms in the securities market, credit information companies and commodity exchanges have sub-limits within an overall cap. Commodity exchanges have a 23 per cent FII limit and a 26 per cent FDI limit. These separate limits will be retained, given the sensitive nature of the financial sector, according to the proposal.

Besides, if FII investment rises beyond 24 per cent in existing drug companies, it will be subject to government approval, as well as certain riders. Clearance will also be needed for Indian companies established with foreign investment and not owned or controlled by a resident entity. For the purpose of control, all forms of foreign investment will be taken into account. Government approval will not be required if the foreign investment permitted is 100 per cent through the automatic route.

In 2014-15, investment by foreign institutional investors (FII) grew by 717 per cent to $40.92 billion. FDI grew by 27 per cent to $30.93 billion in the previous fiscal.