With the view to attract foreign investments in India, the Government of India has introduced composite caps resulting in uniformity and simplicity across the sectors in the Foreign Direct Investment (FDI) Policy. The Ministry of Commerce & Industry, Department of Industrial Policy & Promotion, through the Press Note No. 8 (2015 Series), dated July 30, 2015, made certain amendments in the Consolidated FDI Policy of 2015.
Before the amendments in the Consolidated FDI Policy Circular of 2015, these sectors had sub-limits within an overall cap. Different categories of caps lead to a situation where the person who is investing and the person receiving the investment got confused and had to be more careful that he did not exceed the limit. So, it lead to a lot of layered due diligence to be maintained. In order to treat all foreign investment with the same kind of parity and bring about clear understanding among investors, the composite caps have been introduced.
Main highlights of the amendments have been outlined as follows:
1. It is also clarified that Foreign investment as well as for the purpose of computation of indirect foreign investment, foreign investment in an Indian company, both shall include all types of foreign investments, direct and indirect, regardless of whether the said investments have been made under Schedule of the following:
a) Foreign Direct Investment (FDI),
b) Foreign Institutional Investor (FII),
c) Foreign portfolio Investor (FPI),
d) Non-resident Indian(NRI),
e) Foreign Venture Capital Investor (FVCI),
f ) Qualified Financial Institution (QFI),
a) Limited Liability Partnerships (LLPs) and
a) Depository Receipts (DRs), of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations.
2. An FII/FPI/QFI (under FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations) may invest in the capital of an Indian company under the Portfolio Investment Scheme which limits the individual holding of an FII/FPI/QFI below 10% of the capital of the company and the aggregate limit for HI/FPI/OR investment to 24% of the capital of the company. This aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling, as applicable, by the Indian company concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body and subject to prior intimation to RBI. The aggregate FII/FPI/QFI investment, individually or in conjunction with other kinds of foreign investment, will not exceed sectoral/statutory cap.
3. Portfolio investment, upto aggregate foreign investment level of 49% or sectoral/statutory cap, whichever is lower, will not be subject to either Government approval or compliance of sectoral conditions, as the case may be, if such investment does not result in transfer of ownership and/or control of Indian entities from resident Indian citizens to non-resident entities. Other foreign investments will be subject to conditions of Government approval and compliance of sectoral conditions as laid down in the FDI policy.
4. Total foreign investment, direct and indirect, in an entity will not exceed the sectoral/statutory cap.
5. It is clarified that there are no sub-limits of portfolio investment and other kinds of foreign investments in commodity exchanges, credit information companies, infrastructure companies in the securities market and power exchanges. Thus, they will now have the flexibility to have overseas equity in any form up to the sectoral cap.
6. However, separate limits for FPI and FDI will remain for banking and defence sectors. In Defence sector, portfolio investment by FP1s/FIls/NRIs/QFIs and investments by FVCIs together will not exceed 24% of the total equity of the investee/joint venture company. In Banking- Private sector, where sectoral cap is 74%, FII/ FPI/ QFI investment limits will continue to be within 49% of the total paid up capital of the company.
7. There is no change in the entry route i.e. Government approval requirement to bring foreign investment in a particular sector/ activity. Further, subject to the amendments mentioned in this Press Note, there is no change in other conditions mentioned in the Consolidated FDI Policy Circular of 2015 and subsequent Press Notes.
The Government, on continuous basis, has been liberalizing FDI Policy not only making it friendly to foreign investors but also taking into the loop the domestic concerns and overall economic growth.
The main reason behind the composite caps was to bring clarity in all types of foreign money coming into the country and thereby promoting ease of doing business. As a result, the composite caps would do away with the sub-limits, while only the sector cap would be maintained. The composite caps will lead to greater transparency as the policy has been clearly defined. Also, investors will have greater clarity and understanding on the consolidated FDI policy, Which would result in increase in the foreign investment in the country.
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