GoI Okays Composite Cap for Foreign Investments

In what is seen as a significant simplification of the foreign direct investment policy, the Union Cabinet approved a proposal to scrap the distinctions among different types of overseas investments by shifting to a single composite limit.

The New approval also means that portfolio investment up to 49 percent will not need government approval or have to comply with sectoral conditions as long as it doesn’t result in transfer of ownership and/or control of any Indian entities to foreigners.

Multi-brand retailers, Pharma companies that do not have sub limits within the overall limit and will henceforth not need an approval for increasing portfolio investment up to 49 percent of the total holding. “One of the most important decisions in relation to the investment is the introduction of composite caps for simplification of foreign direct investments”, Finance Minister Arun Jaitley said.

This announcement is sentimentally positive and has helped private banking stocks and credit rating stocks trade positive.  Markets believe this move will help create more room for foreign investment.Axis bank rose 4.14 percent, Kotak Mahindra Bank advanced 4 percent and Yes bank rose 3.11 percent at the close of the trade.

It is confirmed by a government official that the sectors such as banking, defence, credit rating, power exchanges & commodity exchanges will continue to face restrictions.Composite caps have been suggested for sectors like agriculture, petroleum and natural gas, manufacturing, airports, real estate and telecommunications amongst others.The  government’s decision on sectoral conditionality  has created some confusion for sectors like defence, banking and insurance.

For defence the sub-sectoral limit for Foreign Institutional Investor (FII) is  24 percent and that will stay. Similarly for the private banking space any FII investment beyond 49 percent despite 74 percent now being treated as a composite cap will still need the Foreign Investment Promotion Board (FIPB) approval.  For the insurance sector there is already a composite cap.

For the insurance sector there is already a composite cap. Also as per the SEBI definition the FII sub- sectoral limit is actually at 24 percent. So, that is not really changing unless SEBI comes out with further notification. Even then the 26 to 49 percent migration will still need an FIPB approval.