FII stake not outside FDI limit: Finmin
Finance ministry has blocked proposal DIPP to allow FIIs to invest over and above the sectoral caps on foreign investment. Why are FIIs pulling out? | Remittance made easy
By Deepshikha Sikarwar & G Ganapathy Subramaniam, ET Bureau |
NEW DELHI: The finance ministry has blocked a proposal from the department of industrial policy and promotion (DIPP) to allow foreign institutional investors (FII) to invest over and above the sectoral caps on foreign investment. FII stake should not be taken into consideration while calculating FDI in sectors, for example telecom, which have a foreign investment cap, the department had suggested.
Several other departments also have reservations on the issue which is snowballing into a controversy, government sources said. Already, there are varying opinions over differences between FDI and portfolio investments, especially in a sector like real estate.
The proposal has huge implications for the telecom sector, stock exchanges, commodity exchanges, asset reconstruction companies and broadcasting, to name a few. In the telecom sector, overall FDI cap of 74% includes FDI, FII, and NRI stake, while in the asset reconstruction sector only FDI is permitted. In different segments of broadcasting, foreign investment limits include both FDI and FII.
The home, defence and external affairs ministries have reservations on allowing FII investment over and above FDI, government sources said. This could lead to a demand for hiking the foreign investment cap in sectors like telecom and stock exchanges, it is felt. It is learnt that national security advisor M K Narayanan also does not favour such a move. These ministries have demanded that the proposal should be shelved. The resistance has stalled the proposal from progressing further.
Dipp, on the other hand, feels relaxation of FDI norms would attract more investments in this time of global financial uncertainty. The department had consulted industry representatives recently on various issues including indirect foreign stake, holding companies and the sub-ceiling on FII investments. It is felt that FII purchases in the stock market need not be tracked if the relaxation by the department is approved. However, if the stake held by an FII in a company goes beyond a point, then it has to be seen as FDI.
If the Dipp���s proposal is accepted by the government, a foreign investor can choose to invest through the FII route to consolidate stake obtained in an Indian firm through the FDI route.
The lack of clarity in the treatment of FDI and FII was highlighted in the real estate sector recently. The categorisation of the pre-initial public offer (IPO) investment by FIIs led to a protracted dispute, before it was decided that such investments would be considered FDI which attracts a three-year lock-in. The issue was also debated in the case of the asset reconstruction business and the stock exchanges. Even in a sector like insurance, where the government is considering raising the foreign investment cap to 49%, there is ambiguity about whether FII investment should be subsumed in it.
Several other departments also have reservations on the issue which is snowballing into a controversy, government sources said. Already, there are varying opinions over differences between FDI and portfolio investments, especially in a sector like real estate.
The proposal has huge implications for the telecom sector, stock exchanges, commodity exchanges, asset reconstruction companies and broadcasting, to name a few. In the telecom sector, overall FDI cap of 74% includes FDI, FII, and NRI stake, while in the asset reconstruction sector only FDI is permitted. In different segments of broadcasting, foreign investment limits include both FDI and FII.
The home, defence and external affairs ministries have reservations on allowing FII investment over and above FDI, government sources said. This could lead to a demand for hiking the foreign investment cap in sectors like telecom and stock exchanges, it is felt. It is learnt that national security advisor M K Narayanan also does not favour such a move. These ministries have demanded that the proposal should be shelved. The resistance has stalled the proposal from progressing further.
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The thin line between foreign direct investment and foreign institutional investment has raised many a eyebrows among policy makers. RBI had recently written to the finance ministry to closely examine the issue. Dipp had circulated a draft Cabinet note seeking views from the ministries concerned. The draft note proposes to relax FII investments in sectors that have composite caps. To put it simply, telecom sector has overall foreign investment limit of 74%. If the Dipp proposal is accepted, a telecom company that has 74% FDI in it can also have FII equity over and above this limit. The finance ministry, however, is not in favour of such a relaxation for now. Sources in the ministry said that the move would be against the spirit behind sectoral limits on such investments.Dipp, on the other hand, feels relaxation of FDI norms would attract more investments in this time of global financial uncertainty. The department had consulted industry representatives recently on various issues including indirect foreign stake, holding companies and the sub-ceiling on FII investments. It is felt that FII purchases in the stock market need not be tracked if the relaxation by the department is approved. However, if the stake held by an FII in a company goes beyond a point, then it has to be seen as FDI.
If the Dipp���s proposal is accepted by the government, a foreign investor can choose to invest through the FII route to consolidate stake obtained in an Indian firm through the FDI route.
The lack of clarity in the treatment of FDI and FII was highlighted in the real estate sector recently. The categorisation of the pre-initial public offer (IPO) investment by FIIs led to a protracted dispute, before it was decided that such investments would be considered FDI which attracts a three-year lock-in. The issue was also debated in the case of the asset reconstruction business and the stock exchanges. Even in a sector like insurance, where the government is considering raising the foreign investment cap to 49%, there is ambiguity about whether FII investment should be subsumed in it.
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