Now, all foreign investments to have single cap

Getting rid of the confusion over limits for different types of foreign investments in Indian companies, the government on Thursday simplified it by bringing all foreign investments under a single cap.

Another major decision was the announcement of upping the foreign portfolio investment (FPI) cap to 49% from the current 26%. This means FPI up to 49% in a listed Indian company can now come through automatic route and would not require the Foreign Investment Promotion Board (FIPB) approval. However, if there is a foreign investment limit in a particular sector then the FPI would be up to that cap.

With more clarity on how various overseas investments would be treated, sectors such as defence, banking, power exchanges, commodity, credit information and others that had intrinsic caps within foreign investment ceilings will now have the liberty to raise foreign capital through any route.

For instance, earlier defence companies had an inter-se cap of 26% FPI and 23% foreign direct investment (FDI) within the 49% capital it was allowed to raise abroad. Now, they can tap any foreign investment source as long as they stayed within that limit.

Similar, inter-se caps for overseas funding in power exchanges, commodity exchanges, credit information companies and others would also go.

Devraj Singh, executive director - tax & regulatory services, EY, termed the government decision bold and expected it would give a big boost to ease of doing business in India.

"Sectors such as defence, banking, power exchanges, credit information companies would be benefited out of this policy change as earlier there was inter-se cap for portfolio and FDI investment within overall sectoral cap," he said.

Rana Kapoor, managing director and CEO of YES Bank, said the new norm will help his bank in capital raising by giving it more headroom to increase the FII holding.

"Approval of composite cap for foreign investment, while may appear procedural, is a significant reform for the economy as a whole as there will be more capital flowing into the system and significantly easing the procedural investment decisions by foreign investors," he said.

Kapoor said with a board and shareholder approval for increasing the FII limit up to 74% from the current 49% already in place, the new rule gives it the "flexibility" to source foreign funds from any route.

"This (no discrimination between different foreign investments) will enhance flexibility of various capital raising options, including American Depository Receipts (ADR)/ Qualified Institutional placement (QIP) plans," he said.
In 2014-15, investment by foreign institutional investors (FII) grew 717% to $40.92 billion while FDI grew 27% to $30.93 billion in the previous fiscal.