by Moiz Mannan
Non-resident Indians (NRIs) who have kept India at the top of the remittance receiving countries’ list, are likely to retain their privileges as an investor class even as Indian authorities are close to finalising a ‘Harmonised Model’ for foreign investment.
A single portfolio investment route and a clear distinction between FDI and portfolio investments would make it immensely easier for all foreign investors including NRIs to participate in India’s growth story.
It all started earlier this year when the Union Budget presented by Finance Minister P Chidambaram had put forth the proposal saying that FII and FDI definition should be clarified.
There was a view, supported by the FM, that Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs) and Foreign Venture Capital Investors (FVCIs) should all be bundled together into the category Qualified Foreign Investor (QFI). The only discrimination would be between portfolio and non-portfolio investments. Two separate committees were set up to work out the clarifications and streamline the system. One by SEBI under Former Cabinet Secretary KM Chandrasekhar to look at harmonising portfolio investment routes - and another by the finance ministry under current Economic Affairs Secretary Arvind Mayaram to define what distinguishes FDI from FII.
This report of the Chandrashekhar’s “Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments” describes the various portfolio investment routes which are currently available to foreign investors and suggests a draft guideline and regulatory framework for rationalisation of foreign portfolio investments, keeping as a starting point, the recommendations of the Working Group on Foreign Investment in India (WGFI), for consideration of the Government.
This report also provides recommendations for a harmonized model of investment routes designed to overcome the shortcomings of multiple routes that exist today.
As a ‘Harmonized Model’, the Committee has recommended creation of a single route for various Foreign Portfolio Investors (FPI) by merging the present day FII, Sub Account and QFI regimes where there will be common market entry, limit monitoring and reporting norms.
However, there will be segregations for applying risk based Know Your Customer (KYC) norms, Investment guidelines and restrictions.
The Committee felt that NRIs/PIOs presently have a liberal route for accessing securities market. NRIs/PIOs should continue to be viewed as a distinct market participant enjoying certain privileges in terms of investment permissions not available to foreign investors. Accordingly, the Committee recommended to retain NRIs as a separate investor class with the same limits as currently applicable (i.e. 10% of the paid up capital of the investee company).
The Committee felt that FVCI route has certain benefits such as non applicability of pricing norms and relaxation from post IPO lock in requirement. These benefits have been given to FVCI route to promote Venture Capital Investments.
Accordingly, the Committee recommended that the FVCI as an investor class would continue. Additionally, the Committee recommended that the current FVCI regime should be expanded to include more sectors under its ambit as against the currently prescribed 9 sectors.
Foreign Portfolio Investor
The Committee recommended for merging of FII, Sub Account and QFI into a new investor class to be termed as “Foreign Portfolio Investor” (FPI).
The Mayaram-Khan Committee, on its part, too is learnt to have finalized a draft that is to be submitted to the Finance Minister this month. The panel has discussed a 49 percent cap on FII investment say media reports.
The panel has discussed that there should be a 49 percent cap for FII and FDI tends to come in through the portfolio route because there are no conditions on FII investment.
FII investment can go up till the sectoral cap with just a board resolution.
In order to ensure that, for instance in multi brand retail, the FDI that comes in meets with stringent conditions and the FII doesn’t.
In order to ensure equal treatment, there should be a 49 percent cap on FII investment.
However, certain operational issues still need to be addressed. The committee is working on how to categorise FDI holding which falls below the proposed 10 per cent cap still need to be worked out.
Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India.
The ceiling for overall investment for FIIs is 24 percent of the paid up capital of the Indian company and 10 percent for NRIs/PIOs. The limit is 20 percent of the paid up capital in the case of public sector banks, including the State Bank of India.
The ceiling of 24 percent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect.
And the ceiling of 10 percent for NRIs/PIOs can be raised to 24 percent subject to the approval of the general body of the company passing a resolution to that effect.
The Peninsula
