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The country’s foreign investment regime might see a major overhaul if the government accepts the draft recommendations of the Arvind Mayaram (economic affairs secretary) committee.
The committee has suggested that all individual foreign investments of up to 10 per cent of paid-up equity in a listed company be classified as foreign portfolio investment (FPI) and those above this limit be considered foreign direct investment (FDI). At present, the size of investment is not a criterion for classification.
According to sources, the committee has also suggested that the cap on aggregate default FPI in a company be set at 24 per cent. However, the investee company concerned could increase the limit to the sectoral cap allowed under automatic route. It could do so after its board passes a resolution, which is to be later approved by shareholders.
For instance, in the telecom sector, foreign investment of up to 100 per cent is allowed but only 49 per cent can come through the automatic route. So, the FPI limit in telecom companies will be 24 per cent, but it could be increased to up to 49 per cent.
The panel has also suggested that portfolio investment by a single investor should not exceed 10 per cent in the initial public offering (IPO), or follow-on public offering (FPO), of a listed or to be listed company. Any foreign investment beyond the threshold of 10 per cent of paid-up equity capital in a listed company — and any foreign investment in an unlisted company — should be considered FDI. Foreign investment through a private arrangement also be treated as FDI. Besides, Investments by non-resident Indians (NRIs) should not form part of these suggested definitions and should be reviewed separately, the panel has recommended.
Analysts, however, seem sceptical about implementation of these suggestions. “The new FPI and FDI definitions, if accepted by the government, may be extremely difficult to implement. It will require fundamental amendments to several laws, such as the Sebi Act, Foreign Exchange Management Act, Securities Contracts (Regulation) Act, Income Tax Act, etc,” Punit Shah, co-head of tax at KPMG told Business Standard.
These new definitions are not to apply to the current arrangements — such as the investment by Abu Dhabi-based Etihad Airways in Jet Airways — since the panel has exempted existing deals from the new rules.
Analysts also believe that it might be difficult to monitor FPI and FDI limits wherever there are separate sectoral caps. If FDI and FPI caps in a given sector are separately defined, exceeding the FPI cap of 10 per cent will convert the investment into FDI and sectoral caps may be breached. For example, for investment in stock exchanges, there is a 26 per cent cap on FDI but 23 per cent limit for foreign institutional investors.
To avoid this problem, the panel has suggested that the default overall cap — for both FDI and FPI — be set at 49 per cent, if control of a company rests with Indians. Within that, the default FPI cap could be set at 24 per cent (which could be raised up to 49 per cent).
In such a case, it will be for the company concerned to decide how much within this 49 per cent cap should be FDI and how much FPI. Insurance, defence and media sectors, according to the committee, should be exceptions to this rule.
Besides, the panel has said FDI below 10 per cent could be allowed in listed entities, provided the stake is raised beyond 10 per cent within a stipulated period. The government, sources said, was likely to take a call on these recommendations by the end of this month.
The committee has suggested that all individual foreign investments of up to 10 per cent of paid-up equity in a listed company be classified as foreign portfolio investment (FPI) and those above this limit be considered foreign direct investment (FDI). At present, the size of investment is not a criterion for classification.
According to sources, the committee has also suggested that the cap on aggregate default FPI in a company be set at 24 per cent. However, the investee company concerned could increase the limit to the sectoral cap allowed under automatic route. It could do so after its board passes a resolution, which is to be later approved by shareholders.
For instance, in the telecom sector, foreign investment of up to 100 per cent is allowed but only 49 per cent can come through the automatic route. So, the FPI limit in telecom companies will be 24 per cent, but it could be increased to up to 49 per cent.
The panel has also suggested that portfolio investment by a single investor should not exceed 10 per cent in the initial public offering (IPO), or follow-on public offering (FPO), of a listed or to be listed company. Any foreign investment beyond the threshold of 10 per cent of paid-up equity capital in a listed company — and any foreign investment in an unlisted company — should be considered FDI. Foreign investment through a private arrangement also be treated as FDI. Besides, Investments by non-resident Indians (NRIs) should not form part of these suggested definitions and should be reviewed separately, the panel has recommended.
Analysts, however, seem sceptical about implementation of these suggestions. “The new FPI and FDI definitions, if accepted by the government, may be extremely difficult to implement. It will require fundamental amendments to several laws, such as the Sebi Act, Foreign Exchange Management Act, Securities Contracts (Regulation) Act, Income Tax Act, etc,” Punit Shah, co-head of tax at KPMG told Business Standard.
| DRAFT SUGGESTION BY THE MAYARAM PANEL |
A) LISTED COMPANY
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These new definitions are not to apply to the current arrangements — such as the investment by Abu Dhabi-based Etihad Airways in Jet Airways — since the panel has exempted existing deals from the new rules.
Analysts also believe that it might be difficult to monitor FPI and FDI limits wherever there are separate sectoral caps. If FDI and FPI caps in a given sector are separately defined, exceeding the FPI cap of 10 per cent will convert the investment into FDI and sectoral caps may be breached. For example, for investment in stock exchanges, there is a 26 per cent cap on FDI but 23 per cent limit for foreign institutional investors.
To avoid this problem, the panel has suggested that the default overall cap — for both FDI and FPI — be set at 49 per cent, if control of a company rests with Indians. Within that, the default FPI cap could be set at 24 per cent (which could be raised up to 49 per cent).
In such a case, it will be for the company concerned to decide how much within this 49 per cent cap should be FDI and how much FPI. Insurance, defence and media sectors, according to the committee, should be exceptions to this rule.
Besides, the panel has said FDI below 10 per cent could be allowed in listed entities, provided the stake is raised beyond 10 per cent within a stipulated period. The government, sources said, was likely to take a call on these recommendations by the end of this month.
