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There are investment caps or ceilings on specific sectors. While 100% foreign
investment is allowed in many sectors from food processing to railway
infrastructure to non-banking finance companies, there is a 74% cap in private
banks, and 49% in insurance, defence and commodity exchanges, clearing
corporations, stock exchanges and depositories.
Within the overall cap, there have been sub-ceilings for various categories of
foreign investors. So in commodity exchanges, for instance, FDI is capped at
26%, while combined FPI cannot exceed 23%, which applies to even stock and
power exchanges or depositories. And even when FIIs are allowed to invest
23% or more in certain sectors, an individual FII or FPI can invest only up to a
maximum of 10%.
The change in governments policy now
The approval of the so-called composite cap has no effect on the sectoral
ceilings. Thus, foreigners cannot own more than 49% in any insurance or
defence venture. But the current distinctions between FDI, FPI and other
categories of foreign investors have been abolished. The colour of the mice (or
cats!) does not matter so long as these are foreign, and so long as they dont
own more than the prescribed limit, if any, in a particular sector.
Composite cap applicable to all sectors except two
The proposed composite cap will be applicable to all sectors except defence and
banking. So for private banks, portfolio or FII investment can go up to a
maximum of 49%, and the overall limit will be 74%. For public sector or stateowned banks, nothing changes as the foreign investment limit was restricted
to 20% much earlier. In the defence sector, within the 49% investment ceiling,
foreign portfolio limits will continue to be 24%. The change will be reflected
more in investments in commodity, stock and power exchanges. Prior to the
composite cap, portfolio investment was capped at 23% in these segments it
can now go up to the full sectoral limit of 49% without any distinctions.
A potentially significant decision
A composite cap helps remove uncertainty for both investor and investee
companies. It provides greater clarity and legal certainty, eliminates
inconsistencies, lowers transaction overheads, and does away with the costs of
complying with multiple sets of rules and dealing with multiple regulators and
authorities. It should boost overall investment flows, especially in sectors with
multiple caps or ceilings such as commodity, power and stock exchanges,
besides credit information companies. Foreign investors such as the
Government of Singapore, which has a few investment arms in India, may not
have to worry now about breaching limits while buying into companies as FDI
or FII.
There are some concerns
Concerns in the defence sector relate to national security, and in the banking
sector to hot money flows or the threat of volatile capital and to the
potential risk of a group of investors joining hands, especially through the
portfolio route, to take control of banks. The RBI had flagged the latter concern
in the case of a few old private banks therefore, even now any investment of
5% or more in the banking sector has to be approved by the central bank. There
are also worries about laundered money or terror funds coming into certain
sectors, apart from attempts to round-trip money back into the country.
But composite cap isnt an altogether new idea
Finance Minister Arun Jaitley announced the governments intentions in his
Budget speech in February. Earlier in 2013, then Finance Minister
P Chidambaram had said that the government would remove the ambiguity over
FDI and FII, and follow global best practices. And back in its Budget of 200203, the NDA government had said that portfolio investment would not be
subject to sectoral limts except in specified sectors. For well over a decade,
several official committees have addressed the issue of boosting foreign
investment: in 2002, the then Planning Commission member N K Singh headed
an inter-ministerial steering group on FDI; there was the Ashok Lahiri
Committee in 2003-04; the U K Sinha Committee in 2010 and, finally, the
Arvind Mayaram Committee which submitted its report in 2014.