Govt Notifies Norms | FIIs Can Invest 49% Sans Nod
In its latest attempt to boost investment, the government on Thursday notified new norms putting in place composite foreign investment limits -including non-resident Indian, venture capital, direct, institutional, portfolio flows from overseas -for all sectors other than banking and defence.
The decision will allow greater flexibility to FIIs in several sectors, including retail, brownfield ventures in pharmaceuticals as well as insurance and pension, where they can invest up to 49% without having to seek government approval. In addition, sectors such as scientific journals, facsimile edition of foreign newspapers, tea plantation and mining & mineral separation of titanium are expected to benefit. These sectors mandated prior government approval, which often resulted in delays and increased transaction costs.
The move will come as a damper for several banks, which had hoped that the FII limit would be aligned with the 74% foreign investment ceiling. Lenders such as Yes Bank were hoping that an easing of the limit would help them tap funds more easily (see table). Others such as HDFC Bank, Kotak Mahindra and IndusInd have more headroom. But, the government said like defence, private banks are a “strategic sector“ and the ceiling is not being hiked.
“This is a major policy change as it will allow greater flexibility to companies in most sectors,“ said a senior government official.
Sources also said that the press note issued on Thursday is also meant to provide clarity and has ensured that there will be grandfathering of investments that took place before the new rules were notified. Source: BSE The rules, however, clearly stipulate that the sector limit would not be breached under any circumstances due to automatic approval to FII flows up to 49%. “You can't have a situation in an insurance firm, where there is, say , 49% FII in addition to FDI as it will result in a breach of the sectoral limit,“ explained an officer.
The press note further said that funds coming through debt instruments like foreign currency convertible bonds (FCCBs) and depository receipts will not be treated as foreign investment till they are converted into equity . It also clarified that the equity holding by a person resident outside India resulting from conversion of debt instrument will be reckoned as foreign investment.
