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India clubs all types of foreign capital to set equity limits

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  17 July 2015 12:00 AM GMT

New Delhi, July 16: In a reformist move to attract more foreign investment and simplify the norms, India on Thursday clubbed the categories under which capital flows into domestic companies from abroad, to determine the compliance towards overseas equity cap imposed in some sectors. In a decision taken by the union cabinet at a meeting presided over by Prime Minister rendra Modi, foreign institutiol investment, foreign portfolio investment, qualified foreign investment, non-resident Indian investments have been clubbed into a single composite category.

“The cabinet approved the introduction of composite caps for the simplification of foreign direct investment,” Fince Minister Arun Jaitley told reporters here after the decisions, adding relevant changes in the consolidated policy on foreign equity have also been given a nod.

Among the decisions, a single entity under any of these categories can invest up to 10 percent of the capital of a company, while collectively it can go up to 24 percent. But the cabinet has allowed companies to raise the limit of such investments beyond 24 percent as long as these fall within the sectoral cap in which it operates. This apart, no changes were made in the existing limits on foreign equity in various sectors.

“The decision of merging the limits of foreign direct and portfolio investments into a composite cap is essentially a move towards giving companies more flexibility for deciding on the desired mix of foreign investment,” a senior fince ministry official said.

“It will also bring in transparency and clarity on the country’s foreign investment policy.” For the purpose of calculating foreign direct investment, equity funds injected by various types of entities mentioned above will be clubbed, irrespective of how and in what form it has been made. But debts will not be treated as foreign equity unless they are to be converted into shares.

For foreign indirect investment, that is inflows in the form of venture capital or seed money, by entities that are otherwise not engaged in the business that the target company operates, will also be clubbed as above to determine the adherence to the sectoral cap. Here, too, debt will be exempt.

These decisions will, however, not impact on sectors where the government already permits 100 percent foreign equity, a note issued after the cabinet decision said. But they will apply in cases — like transfer of ownership from an Indian to a foreign entity — where prior government approval is mandatorily required.

While the domestic industry and foreign players have been seeking such changes, some political parties, notably the Congress and the Communists, have opposed it on the ground that portfolio investment is in ture a short-term, hot money that can leave the country at any time. But Prime Minister Modi’s government has maintained that an overhaul such as one on Thursday was long pending. (IANS)

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