Government approves composite cap, to help labor intensive sectors

17 Jul 2015 Evaluate

Finally the government has introduced composite cap for foreign investments through FDI, FII and NRI routes. From now onwards, all FIIs, NRIs and other foreign investments will be clubbed and constituted as composite cap. Foreign investment in banking and defence sectors will continue to have separate caps for FII and FDI and no changes have been made with regard to specific foreign investment norms for these sectors. In the case of banks and the sectors which are already on a 100 % automatic route would not be affected. The portfolio investment for banking and defence is capped at 49 % and 24 % respectively.

This move from government will benefit sectors where labor has a high potential, retail companies, stock exchanges among others, credit information firms and other market infrastructure institutions such as commodity and power exchanges, as they can bring in foreign investments either as FDI or FII up to the composite cap. Investments made through Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts (DRs) would not be treated as foreign investment unless the debt is converted into equity.

In order to bring uniformity and simplicity in FDI policy for attracting foreign investments, Cabinet also approved the proposal of the DIPP to review the extant FDI policy on various sectors by introducing composite caps.

FII investment is limited to 49 % within the overall cap of 74 %. In the case of commodity exchanges, FII is capped at 23 % within the overall limit of 49 %. As per the FDI policy in Print media, 'FDI up to 26 % is permitted with government approval. After the change, portfolio investment up to 49 % is permitted without government approval if there is no change in control of resident Indian citizen'.

This concept of composite cap is introduced to simplify foreign investment norms and to help remove ambiguity on application of sectoral caps, conditions and approval requirements in different sectors. This will attract more capital flowing into the system and ease the procedural investment decision by investors and will provide options to both the foreign and domestic investors. The new policy also means portfolio investment up to 49 % will not require government approval or have to comply with sectoral conditions as long as it doesn't result in transfer of ownership and/or control of Indian entities to foreigners, this proposal will immediately benefit sectors such as multi-brand retail and pharmaceuticals that do not have sub-limits within the overall limit and hence will not need approval for increasing portfolio investment up to 49 % of the total holding.

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