New Delhi: Foreign direct and portfolio investments will be clubbed together with investments by non-resident Indians (NRIs) under a composite sectoral cap in a decision taken by the cabinet on Thursday to simplify India’s investment regime and give companies greater leeway in choosing how they plan to raise capital.

Companies can raise foreign portfolio investments (FPIs) of up to 49% without prior government approval or compliance with any sectoral conditions.

The government also gave the freedom to companies to either source foreign direct investment (FDI) or foreign portfolio investment or NRI investment within the overall foreign investment sectoral caps.

The move simplifies procedures and leaves room for further investments by overseas entities. It also clears the way for private sector banks to raise fresh capital.

Foreign institutional investors (FIIs) hold stakes of around 45% in private sector banks, much lower than the overall foreign holding cap of 74%. A large chunk of the overseas holding is held by FPIs, which had a separate cap of 49%, crimping banks’ ability to attract more investment.

“For the banking sector in particular, as also for Yes Bank, it is a great development," said Rana Kapoor, managing director and chief executive officer of Yes Bank Ltd.

“Yes Bank has already got board approval in April 2015 and an enabling approval from our shareholders for increasing the FII limit up to 74%...in June 2015. Currently our FII holding is below 49%. Therefore, from Yes Bank’s capital raising perspective, we now have headroom to substantially increase the FII holding..," he added.

Led by bank shares, the benchmark BSE Sensex rose to a three-month high on Thursday, rising 0.9% to 28,446.12. Shares of Axis Bank Ltd gained 4.1%, while those of Yes Bank rose 3.1% and Kotak Mahindra Bank 4%.

“For sectors such as banking, where currently portfolio investment was restricted up to 49%, the amendment seems to suggest that the said limit could now be raised up to the overall limit of 74%, subject to government approval route for the excess," said Vivek Gupta, partner at BMR Advisors.

The process towards a composite cap was started by the United Progressive Alliance government when P. Chidambaram was the finance minister. A committee under then finance secretary Arvind Mayaram recommended clubbing FDI and FPI limits under the overall foreign investment sectoral cap.

Finance minister Arun Jaitley, in his February budget speech, said the proposal will be implemented. “To further simplify the procedures for Indian companies to attract foreign investments, I propose to do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps. The sectors which are already on a 100% automatic route would not be affected," he said.

The overall foreign investment limit now will comprise of FDI, FPI and investments by non-resident Indians, foreign venture capital investments, qualified foreign investment and investments by limited liability partnerships.

While foreign currency convertible bonds in the nature of debt will not be treated as foreign investment, any conversion of debt instruments held by a resident outside India into equity will be treated as foreign investment.

The onus of compliance with the aggregate foreign investment limit has now been shifted to the investee company from the Reserve Bank of India.

Currently, in sectors such as multi-brand retail (51%), single-brand retail (100%), non-scheduled air transport services (74%), private security agencies (74%), only FDI caps have been prescribed.

With the composite cap notification, companies in such sectors can also raise portfolio investment from the equity market.

For example, in passenger airlines, where 49% FDI is allowed, a company will have the flexibility to either raise FDI or FPI.

This is likely to benefit IndiGo, the country’s largest low-cost carrier, which has filed for an initial public offering with the equity market regulator.

The cabinet decision also paves the way for retail companies such as Future Group to receive portfolio investment of up to 49% from equity market, despite the government’s reservations on allowing FDI in multi-brand retail.

It is still not clear whether the notification will override sectoral sub-limits put forth under the current regulation. For example, the defence sector prescribes a limit of 24% for portfolio investment within the overall sectoral limit of 49%.

If one goes by the cabinet decision, a defence company can raise portfolio investment of up to 49% without seeking government approval or abiding by sectoral regulations.

The government has clarified that foreign investment in sectors under government approval route resulting in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities will be subject to government approval.

“Portfolio investment up to aggregate foreign investment level of 49% will not be subject to either government approval or compliance of sectoral conditions, as the case may be, if such investment does not result in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities," a cabinet statement said.

P.R Sanjai in Mumbai contributed to this story.

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