India's Ministry of Commerce & Industry released an updated 'Consolidated Foreign Direct Investment Policy Document,' liberalizing norms for commodity exchanges, non-banking finance companies or NBFCs and foreign institutional investors or FIIs.
As per the policy document, foreign investment in commodity exchanges will become easier now, while import of second-hand capital goods getting tougher.
In case of commodity exchanges, presently there is a composite foreign investment cap of 49 percent (FDI limit of 26 percent and FII ceiling of 23 percent) which requires Indian Government/Foreign Investment Promotion Board (FIPB) approval. With the change in the norms, the FIPB nod would be required only for the FDI component and not for the FII investment.
"This change aligns the policy for foreign investment in commodity exchanges with that of other infrastructure companies in the securities markets, such as stock exchanges, depositories and clearing corporations," an official statement said.
At present, issue of equity shares is permitted under the government approval route for import of capital goods/machinery/equipment, including second-hand machinery, subject to certain riders.
Based on representations that the Indian capital goods sector has been suffering due to import of cheaper second-hand machinery, the second-hand machinery has now been excluded from the purview of the policy to incentivise machinery with technology, compliant with international standards, in terms of being green, clean and energy-efficient.
The government has clarified that the activity of 'leasing and finance' (among the 18 NBFC activities where FDI is permitted) covers only 'financial leases' and not 'operating leases.' Currently, 100 percent foreign investment in NBFCs under the 18 heads is allowed through the automatic route (without FIPB nod). Now, 'operating lease' activity in NBFCs will not come under the automatic route.
FII investment norms have also been changed. Presently, the Portfolio Investment Scheme limits the individual holding of an FII to ten percent of a company's capital and the aggregate for FII investment to 24 percent.
This aggregate 24 percent FII limit can be increased to the sectoral cap/statutory ceiling by the Indian company concerned through a resolution by its Board, followed by a special resolution to that effect by its General Body. However, this change (in the sectoral cap) will be subject to prior intimation to the Reserve Bank of India (RBI).
As far as investment by Qualified Financial Investors or QFIs, the Government has permitted QFIs to invest (DPs) in equity shares of listed companies as well as in equity shares in Indian companies which are offered to public in India as per relevant SEBI guidelines/regulations.
Besides, QFls were also permitted to acquire equity shares by way of right shares, bonus shares or equity shares, on account of stock split/consolidation or equity shares on account of amalgamation, de-merger or such corporate actions, subject to the prescribed investment limits. These provisions have now been reflected under the FDI policy as well.
FDI policy in single-brand retail trading and pharmaceuticals sector has been liberalized and now FDI up to 100 percent is permitted under the government route, subject specified conditions.
The consolidated FDI policy document will from now on be released only annually instead of once every six months. The next version of the consolidated FDI Policy would be released on March 29, 2013.
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