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A government committee has turned down an RBI proposal to limit FII investments in the secondary market, considering the significant role foreign investments can play in propping up the economy.
"The suggestion made by the RBI of limiting FII investments to secondary market was discussed. It was felt that considering the stage of capital market, it would not be prudent to place any restriction of this kind as of now," sources said.
The issue was recently discussed at a high level meeting presided over by Department of Economic Affairs Secretary Arvind Mayaram. The meeting was also attended by DIPP Secretary Saurabh Chandra, Chief Economic Advisor Rahguram Rajan and RBI officials.
The RBI had proposed that any investment by a foreign institutional investor (FII) in an Indian investee company over and above 24% should comply with all the extant foreign direct investment (FDI) guidelines as regards pricing and entry point conditions.
The government is keen to promote foreign investments to bridge the widening current account deficit which soared to the historic level of 6.7% of the GDP during the quarter ended December 2012.
The CAD is the difference between inflow and outflow of foreign currency.
Finance Minister P Chidamabaram has been travelling to key global financial centres including Canada, the US, Singapore and Hong Kong to promote India as an investment destination.
Chidambaram, in his Budget speech, had proposed to follow the international practice with regard to defining FDI and FII.
According to the proposed definition, if an investor has a stake of 10% or less in a company, the investment would be treated as FII. And if an investor has a stake of more than 10%, it would be treated as FDI.
Since the beginning of 2013, FIIs have invested Rs 55,580 crore ($10.3 billion) into Indian equities. They invested $24.4 billion in 2012, about $5 billion below record purchases two years ago.
As on April 12, the number of registered FIIs in the country stood at 1,762 and total number of sub-accounts was 6,358.
During the April-January period of the current fiscal, FDI into India declined by 39% to $19.10 billion due to global economic uncertainties.
