A committee led by economic affairs secretary Arvind Mayaram may establish an overall ceiling for overseas investment, whether in the form of long-term foreign direct investment (FDI) or shorter tenure foreign institutional investment (FII).
add_main_imageFinance minister P. Chidambaram, in his budget presentation on 28 February, had introduced a distinction between FDI and FII.
“I propose to follow the international practice and lay down a broad principle that, where an investor has a stake of 10% or less in a company, it will be treated as FII and, where an investor has a stake of more than 10%, it will be treated as FDI,” he had said.NextMAds
Chidambaram set up a committee to examine the application of the principle and work out the details.
The panel led by Mayaram includes the industry department secretary, a deputy governor of the Reserve Bank of India (RBI) and a member of market regulator Securities and Exchange Board of India. The committee is scheduled to meet on Thursday.
“One of the things that the committee will look into is if this is the definition, then it has to make a composite limit,” a top government official said on condition of anonymity. “There is no other way to it. Without composite limit, how do you keep track of what is going on?”
However, the committee has to address the difficult issue of determining whether FII will also be included in sectors where only FDI is allowed within the existing foreign investment limit.
At present, in sectors such as multi-brand retail (51%), defence (26%), private security agencies (49%), Internet service providers (74%) and asset reconstruction companies (49%), only FDI caps have been set, leaving FII investments outside the sectoral cap.
Setting composite limits will do away with the confusion among foreign investors about the distinction between FDI and FII, former industry secretary Ajay Dua said. sixthMAds
“Once done along with increasing sectoral limits, this will help in greater capital inflows,” Dua said.
However, if the government had to set a composite cap, there was no need for bringing in the change in definition in FDI and FII, according to Akash Gupt, executive director at consultancy PricewaterhouseCoopers.
“We thought because FII inflows are by nature only capital inflows without any control and are temporary in nature, the sectoral limits will apply only to FDI,” Gupt said. “If the government brings in the concept of composite limit, then the rationale of change in the definition goes away.”
In an interview to Bloomberg TV, Chidambaram had said last month that the government was looking at removing or relaxing many of the FDI caps across the board.
“Many of these caps are outdated. I think across the board many of these caps can be removed or certainly relaxed. That is another exercise that has begun with the finance ministry and the industry ministry,” he said, without elaborating further.
“But a review is on because some of these caps are completely irrelevant in terms of the changed situation,” he clarified.
Chidambaram, who is in Tokyo to encourage foreign investors to invest in India, reiterated on Tuesday that the government will reform overseas investment caps to attract more investment to help tackle its large current account deficit.
According to existing rules, which RBI is yet to notify, any ceiling below 50% is meaningless since the concerned company would anyway be deemed Indian and can invest in any downstream company without violating FDI rules, said the official cited earlier. “All these issues will also be taken up in the committee,” he said.
