Union Cabinet increases the limit for foreign investments in
stock exchanges from 5% to 15% for selected foreign
Union Cabinet allows the foreign portfolio investors to acquire
shares of a stock exchange through initial allotment.
In continuation of its endeavour to liberalise the existing
foreign direct investment ("FDI") regime
in India, the current government has announced numerous important
policy related clarifications / directives relating to the FDI in
India. Nishith Desai Associates, continuing with its practice of
highlighting important regulatory changes, is bringing you this
alert which provides a brief overview of certain key regulatory
announcements with our comments.
increase in foreign investment limits in a stock exchange
Pursuant to the announcement made by Hon'ble Finance
Minister Shri Arun Jaitley earlier this year during the Union
Budget (2016 - 2017) speech, the Union Cabinet
("Cabinet") chaired by Hon'ble Prime
Minister Shri Narendra Modi has given its approval for raising the
foreign shareholding limit in a recognised stock exchange from 5%
to 15% for foreign owned and controlled stock exchanges,
depositories, banking companies, insurance companies and public
Currently, Regulation 17(3) of Securities Contracts (Regulation)
(Stock Exchanges and Clearing Corporation) Regulations, 2012
("SECC Regulations") states that no
person resident outside India shall, directly or indirectly, either
individually or together with persons acting in concert, acquire or
hold more than 5 per cent of the paid up equity share capital in a
recognised stock exchange.
Similarly, Regulation 17 (2) of SECC Regulations restricts
residents in India from acquiring or holding more than 5 per cent
of the paid up equity share capital in a recognised stock exchange,
directly or indirectly, either individually or together with
persons acting in concert. However, the proviso to that regulation
states that selected residents in India may acquire or hold, either
individually or together with persons acting in concert, upto 15
per cent of the paid up equity share capital in a recognised stock
Stock exchanges, depositories, banking companies, insurance
companies and public financial institutions, that are residents in
India, are permitted to invest in recognised stock exchanges upto
15 per cent of the paid up equity share capital. On similar lines,
the Cabinet with an objective to enhance the global competitiveness
of Indian stock exchanges has allowed foreign owned and controlled
stock exchanges, depositories, banking companies, insurance
companies and public financial institutions to acquire shares of a
recognised stock exchange to the limit of 15 per cent of its paid
up equity share capital.
Foreign portfolio investors may acquire shares of a stock
exchange through initial allotment
Another welcome change made by the Cabinet is to allow the
foreign portfolio investors ("FPI") to
acquire shares of a recognised stock exchange otherwise than
through secondary market i.e. by initial allotment.
Currently Regulation 17 (4) (c) of the SECC Regulations
prohibits FPIs from acquiring shares of a recognised stock exchange
otherwise than through secondary market. Further, it explains that
if the recognised stock exchange is not listed, an FPI may acquire
its shares through transactions outside of a recognised stock
exchange provided it is not an initial allotment of shares and if
the recognised stock exchange is listed, the transactions by a
foreign institutional investor shall be done through the recognised
stock exchange where such shares are listed.
Given that BSE Ltd. has already sought an in-principle approval
from Securities and Exchanges Board of India
("SEBI") to list its securities and
National Stock Exchange of India Limited too, in a press release
issued on June 27, 2016 has expressed the desire to go for listing,
this could be a perfect opportunity for the FPIs to invest in
shares of the two exchanges during their respective initial public
While the above said changes have been approved by the Cabinet,
we shall have to wait for it to be incorporated by the Department
of Industrial Policy & Promotion through a Press Note.
Subsequently, the same would have to be reflected in the
corresponding regulations issued by the SEBI, by way of an
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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