Although liberalized over time, caps on foreign investments in select sectors have been a hallmark of India’s foreign investment policy. Added to this is the prescription of “sub-limits” for specific types of foreign investment such as foreign portfolio investment (FPI) and foreign direct investment (FDI). Currently, in several sectors there are different caps for FPI and FDI. For example, in the banking sector, while there is an overall foreign investment cap of 74%, FPI is capped at 49%. The rest of the foreign investment must necessarily come in through FDI. This has resulted in a complex regulatory regime that curbs the required flow of foreign investment. In order to address concerns, in his Budget Speech in February 2015 the Finance Minister proposed the abolition of sub-limits (or caps) on different categories of investment and the creation of an overall caps for foreign investment. Going by the banking example, therefore, once introduced the total investment through either the FPI or FDI routes (or both collectively) could be 74%.
The Union Cabinet yesterday approved the change as proposed in the Budget, and made available further details regarding the manner in which the composite caps will function. The press release setting out the changes to the Consolidated FDI Policy Circular of 2015 is available here.
The main function of this change is to lump all types of foreign investment into one single category and to obliterate any distinctions for the purpose of computing the sectoral caps. The different categories included are:
- foreign direct investment (FDI);
- foreign institutional investment (FII);
- foreign portfolio investment (FPI);
- non-resident Indian investment (NRI);
- foreign venture capital investment (FVCI);
- qualified foreign institutional investment (QFI);
- limited liability partnership investments (LLPs); and
- depository receipts (DRs).
The outcome of this change is that while certain categories of investors, primarily portfolio investors, were subject to sub-limits, now they can invest up to the maximum permissible composite cap in the relevant sector. This will therefore create additional headroom for foreign investors, which the Government expects will result in further inflow of investments into India. Although the Government’s press release makes these changes uniformly applicable to all sectors, some media reports (here and here) indicate that the banking and defences sectors are excluded from this new dispensation. The Government needs to clarify this position.
The Cabinet decision consistent with various efforts by the Government to ease the doing of business and also to boost manufacturing within the country through its “Make in India” campaign. The background to the press release sets out in great detail the intention of the Government increasing investment flows into India, and seeks to demonstrate the efforts it has already taken in the last year or so in liberalizing the foreign investment policies by using some comparable data from the previous period.
At the same time, foreign investment would be required to comply with various conditions prescribed in specific sectors, and also with other laws and regulations as may be applicable. Moreover, foreign investment in sectors that are under the Government approval route will require such approval to be obtained if a transactions results in a transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities.
One change that could potentially have significant implications is that “portfolio investment, upto aggregate foreign investment level of 49%, will not be subject to either government approval or compliance of sectoral conditions, as the case may be” so long as ownership and/or control is not transferred to non-resident entities. This would have an impact on sectors that are currently eligible for foreign investment of less than 49%, that too under the Government route. Examples of this include terrestrial broadcasting (FM radio), news and current affairs TV channels and print media (news and current affairs) where foreign investment is permitted up to 26% under the Government route. The implications of the present change on these sectors are unclear. One interpretation (more aggressive) would be that portfolio investment is now available up to 49% under the automatic route, which effectively means that the new composite cap overrides the erstwhile lower foreign investment limit. The other interpretation (more conservative) would mean that the new regime applies only to scenarios where foreign investment is otherwise allowed up to 49% or more, but that now it is permitted under the automatic route rather than the Government route for portfolio investment up to 49%. More clarity is awaited.
The press release further clarifies that:
(i) the composite sectoral cap will consider both direct and indirect foreign investment;
(ii) sectors which are already under 100% automatic route without conditionalities would be unaffected by the changes; and
(iii) foreign investments already made under the existing policy to date would be unaffected, and will not require any changes to be made.
While the Cabinet decision eases and streamlines the foreign investment policy, some grey areas arise as a result as discussed above. Given that the decision is to be implemented through a Press Note to be issued by the Department of Industrial Policy and Promotion (DIPP) that effectively amends the Consolidated Foreign Investment Policy, including the sub-limits set out in various sectors indicated in Chapter 6 thereof, a more definitive picture is likely to emerge once that step is accomplished.