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    Department of industrial policy and promotion prepares composite limit draft for foreign investments

    Synopsis

    The current policy allows FIIs and foreign portfolio investors (FPIs) to invest up to 24% in the capital of Indian companies.

    ET Bureau
    NEW DELHI: The department of industrial policy and promotion (DIPP) has finalised proposed foreign investment policy reforms related to composite limits as part of efforts aimed at greater clarity and the plugging of loopholes.

    DIPP, the nodal agency for overseas investment policy, has readied a cabinet note incorporating suggestions from various government departments that had raised concerns over the stringent guidelines recommended for portfolio investment, especially in pharmaceutical companies. The government will prescribe one limit that will include all kinds of overseas investment — foreign direct investment (FDI), foreign portfolio investment, NRI investment, depository receipts, foreign currency convertible bonds and fully and mandatorily convertible preference shares or debentures.

    “No government department has an objection to the basic principle of the need for composite caps. The aim is to attract foreign investment by clearing ambiguity in the existing FDI policy related to sectoral caps and conditionalities. Investors want clarity in policies for safety of investment,” said a government official.

    The note is likely to be presented to cabinet by the end of the month. The current policy allows foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) to invest up to 24% in the capital of Indian companies.

    This limit can be increased to sectoral FDI caps through a special resolution passed by the company’s board and shareholders. A company in a sector in which 49% FDI is allowed through the approval route could also get permission for another 49% through the FII and FPI avenue, taking the overall foreign investment to as much as 98%, DIPP has argued in its note pointing out ambiguities in the policy. The intent in this case was to allow only a 49% stake to foreign investors and keep control in Indian hands. But ambiguity allows a company to effectively become a foreign-owned one.

    However, DIPP has diluted its earlier stand on a stringent policy for investment in existing Indian pharmaceutical companies following objections by the department of economic affairs (DEA) and the department of pharmaceuticals. DIPP had suggested FII and FPI in excess of 24% in brownfield or existing drug makers would require government approval as opposed to 49% recommended for other sectors. “Now for brownfield pharma too we are recommending a 49% cap like the other sectors, as DEA and department of pharma had raised objections,” said the official.

    An increase in FPI and FII limit over 49% either individually or in conjunction, leading to a transfer of ownership or control to foreign investors for a sector that requires government approval, will require permission from the Foreign Investment Promotion Board (FIPB).

    Such a company will also need to abide by performance-linked conditions that may apply to the sector. In areas where there are sub-limits, these will continue. For instance, power exchanges, credit information companies and commodity exchanges have composite limits, but within those the caps for FDI and FII are at 26% and 23%, respectively.


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