Single cap for FDI and FPI to boost foreign investments in country

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The government’s announcement to have a single cap for both foreign direct investments and foreign portfolio investors has brought cheer to corporate. A composite cap for all foreign investments is expected to boost foreign investors’ sentiments as well as help meet the capital requirements of Indian companies.

“The proposal to club both FDI and FPI will have a great impact on the foreign investments directly as it will give a clarity and reduce the ambiguity. The current norms where there were separate caps for FDI and FPI limited the investment exposure and sometimes restricted the investment opportunities,” said Rohit Gadia, CEO of Capitalvia Global Research Limited.

He added, “Besides giving greater flexibility to Indian companies to seek foreign investments, the proposal is also aimed at attracting larger foreign investments as it eliminates the ambiguity on application of sectoral foreign investment caps, though the other side of the coin is it will result in FIIs getting greater play in few sectors immediately.”

In terms of sectors, banking will be most benefitted by the move followed by power exchanges and commodity. “If you pick up any private sector bank, you will wont investments from FDI but mostly FIIs. In the past, banks such as Kotak Mahindra Bank, HDFC bank had gone to the RBI requesting an increase in 49% cap. So, these are the players, who will primarily be most benefitted by the move,” said Ravi Kumar Shingari, partner, Tax at KPMG India.

It should be noted that last year, HDFC bank had received the Foreign Investment Promotion Board’s (FIPB) approval to raise its FIIs limit after a hue and cry over its existing foreign investment in the bank. FIPB had considered the parent company HDFC’s stake as foreign investment, which implied that the bank had already reached the upper limit of the FII holding cap as laid down by the apex bank.

Besides banking, stock markets, insurance and credit information sectors will also gain from the proposal. However, some analysts beg to differ. Analysts are of the view that the single cap proposal is only a sentimental boost and will in fact curb foreign investment.

Interestingly, experts believed that multi-retail brand retail is a very segregated kind of an investment in India. Hence, the single cap will not help the offline retail format much as foreign investors would not invest in a model through which they can only operate in selective cities.

“The model does not work for them and it will never be a profitable investment. In the retail segment, I feel it is the eCommerce that will be benefitted the most as there is a marketplace model where the stock inventory is being held by different companies. So at present, this change will not have much impact as the present regulation is not very conducive to the multi-brand retail model,” added Shingari.

Also, the government will ensure that foreign investment limit is being maintained in multi-brand retail sector.

On being questioned about the impact on the ownership of company, Gadia noted that the change in caps should not affect the company ownership as the total foreign holding will remain the same. “However, a government approval would be required if there is a transfer of ownership or control of Indian companies from resident Indian citizens to non-resident entities,” stated Gadia.

Shingari added that more than the issue of company ownership, the challenge here would be the management of the company, which may substantially be impacted the single cap rule.

Besides, the government will also be responsible for finding ways to ensure that the liberty manages to maintain the equilibrium between the direct investments and portfolio investments.

Nevertheless, experts believed that the proposal will have a positive impact on the foreign investments. As the liberalization of foreign investments will enable companies to raise additional equity capital from multiple sources and will immensely help in boosting foreign investments in the country.
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