The finance ministry has suggested easing of the rules for calculating foreign investment in a company. The proposed rules, which take out sundry entries of indirect investment, will make life easier for companies which have high foreign institutional investment and face the risk of breaching sector-specific caps.
The ministry has said that portfolio investment by foreign institutional investors (FIIs), purchase of shares and convertible debentures by non-resident Indians (NRIs), and those by persons of Indian origin (PIO) should be excluded when calculating foreign investment in a company.
Under the much-debated Press Notes 2, 3 and 4 announced last year, all kinds of foreign investments are included when calculating foreign investment: Foreign direct investment (FDI), FII holdings, NRI holdings, American Depository Receipts, Global Depository Receipts, foreign currency convertible bonds, convertible preference shares and convertible currency debentures, among others. These rules apply to downstream investments by companies with foreign holding.
The finance ministry has asked the Department of Industrial Policy and Promotion (DIPP) to prepare a policy for implementation along the suggested lines.
For companies with direct foreign holding, the caps prescribed at the moment are for FDI alone, except in a few cases where FII or NRI investments are separately capped. For instance, in the case of banking in the private sector, the
74 per cent foreign investment cap includes both FDI as well as FII holdings. Similarly in broadcasting and radio, the 20 per cent FDI cap includes FDI as well as FII investments.
The finance ministry has been of the opinion that there is a need to resolve the contradiction between direct and indirect investments and prescribes a composite cap common to both. The proposal is to exclude FII and NRI investments from the overall cap for direct and indirect investments. The view of the finance ministry has been accepted by DIPP.
FIIs, under the regulations for portfolio investments, can include asset management companies, pension funds, mutual funds, and investment trusts as nominee companies, institutional portfolio managers or their power of attorney holders, university funds and endowment foundations, among others.
The Securities & Exchange Board of India, the stock markets regulator, acts as the nodal point for registration of FIIs.
Under the rules, investment by individual FIIs cannot exceed 10 per cent of an Indian company’s paid-up capital. Investment by foreign registered sub accounts of FIIs cannot exceed 5 per cent of paid-up capital. All FIIs and their sub-accounts taken together cannot acquire more than 24 per cent of the paid-up capital. Indian companies can however raise this ceiling to the sector-specific cap by passing a resolution by its board of directors followed by a special resolution to that effect by its general body.
Portfolio Investments can also be made by NRIs and PIOs, who can purchase or sell shares or convertible debentures of Indian companies on stock exchanges. An NRI or PIO can purchase shares up to 5 per cent of the paid-up capital. All NRIs and PIOs taken together cannot purchase more than 10 per cent of the paid-up capital. The limit can be increased by the Indian company to 24 per cent by passing a general body resolution.
