Government Notifies Composite Cap for Foreign Investment

New Delhi: Sectors like insurance, pension, retail and pharmaceuticals will benefit from introduction of composite cap in the FDI or foreign direct investment policy which came into effect from Thursday.

In all these sectors, foreign portfolio investors (FPIs) can park up to 49 per cent under automatic route.

The government on Thursday notified changes in the FDI policy under which there will be a composite cap on overseas investment in various sectors, except in the banking and defence segments.

The other sectors which will be benefited from this concept include scientific journals, facsimile edition of foreign newspapers, tea plantation, and mining and mineral separation of titanium.

At present, 100 per cent foreign investment under government approval route is permitted in these sectors, except insurance and pension, where the cap is 49 per cent.

However in case of FDI, a foreign investor is required to obtain government approval above 26 per cent, though there is no such restriction on portfolio investments.

A press note further said that portfolio investment up to 49 per cent, subject to the sectoral ceiling, will not need government approval, if they do not result in transfer of ownership or control from Indian citizens to non-Indian entities.

Under the modified norms, all types of direct and indirect overseas investments, whether portfolio or FDI, will be subject to a composite foreign investment cap for that particular sector.

"...there will not no sub-limits of portfolio investment and other kinds of foreign investments in commodity exchanges, credit information companies, infrastructure companies in securities market and power exchanges," said the press note issued by the Department of Industrial Policy and Promotion (DIPP).

However, in private sector banking, there will a sub-limit of 49 per cent on portfolio investment within the overall foreign investment limit of 74 per cent, it said.

Similarly, in case of defence sector, the portfolio investment has been capped at 24 per cent under the automatic route.

Private sector banks such as HDFC bank, ICICI Bank, Yes Bank and Kotak Mahindra bank have space for more portfolio investments as the current foreign institutional investment in these banks are 32.45 per cent, 40.25 per cent, 44 per cent and 35.32 per cent, respectively, as of June 15.

The press note further said that funds flow through debt instruments like foreign currency convertible bonds (FCCBs) and depository receipts (DRs) will not be treated as foreign investment till they are converted into equity.

It clarified that the equity holding by a person resident outside India resulting from conversion of debt instrument will be reckoned as foreign investment.

The Cabinet had earlier this month approved introduction of concept of composite caps with a view to simplify FDI policy and attract foreign investments.