Foreign investment, comprising, amongst others, foreign direct
investment (FDI) and portfolio investment, in
India is regulated by the (Indian) Foreign Exchange Management Act,
1999 (FEMA). Additionally, the Government of
India, from time to time, notifies its policy on FDI and prescribes
the sectoral caps and other conditions for FDI (FDI
Policy). The FDI Policy is adopted by the Reserve Bank of
India (RBI), regulator for foreign exchange
transactions, and notified under relevant regulations under FEMA
(FEMA Regulations). These regulations are subject
to sectoral guidelines issued by regulator/ministry of the relevant
sector from time to time (Sectoral
The FDI Policy and Sectoral Regulations have been progressively
liberalized to permit foreign investment in most sectors. In
continuing with its policy of liberalising foreign investment into
India, the Government has recently further relaxed foreign
investment into Indian stock exchanges. An Indian stock exchange is
a stock exchange that meets the conditions stated in the securities
regulations and has been recognised by the securities market
The existing Sectoral Regulations for securities market prohibit
residents (except select resident institutions) and non-residents
from (directly or indirectly either individually or together with
persons acting in concert) acquiring or holding more than 5% of the
paid up equity share capital in an Indian stock exchange.
These select resident institutions, which are permitted to hold
more than 5%, are (a) a stock exchange; (b) a depository; (c) a
banking company; (d) an insurance company; and (e) a public
financial institution. They are permitted to acquire or hold
(either individually or together with persons acting in concert) up
to 15% of the paid up equity share capital in an Indian stock
The Government has approved changes to Sectoral Regulations
applicable to Indian stock exchanges. This follows the Government
announcement during presentation of the Union Budget earlier this
year, for raising the foreign/non-resident shareholding limit in
Indian stock exchange from 5% to 15%.
The Government has now permitted select non-resident
institutions, namely (i) a stock exchange; (ii) a depository; (iii)
a banking company; (iv) an insurance company; and (v) a commodity
derivative exchange, to hold up to 15% shareholding in Indian stock
exchanges. This brings these non-resident institutions at par with
domestic institutions which were already allowed to invest up to
15% in Indian stock exchanges.
It is pertinent to note that overall ceiling for foreign
investment in Indian stock exchanges continues to remain 49%.
As per the existing Sectoral Regulations and FDI Policy, foreign
portfolio investors are permitted to acquire shares of an Indian
stock exchange only through the secondary market. The Government
has now permitted foreign portfolio investors to acquire shares
through initial allotment, in addition to the secondary market
This liberalisation was a long standing demand of the Indian
stock exchanges. The existing foreign ownership limits were not
seen as attractive by foreign exchanges for investment into the
Indian stock exchanges. If this step encourages enhanced investment
from foreign exchanges, the Indian stock exchanges would stand to
benefit from access to technology, management expertise and best
practices of foreign exchanges. This will mean better functioning
of the Indian stock exchanges and ultimately benefit the investors
and Indian public. The liberalisation has come at a time when two
of the prominent Indian stock exchanges, Bombay Stock Exchange and
National Stock Exchange are planning to list their shares in India
through an initial public offering (IPO). Hence
the liberalisation also comes as a shot in the arms to the listing
plans of these exchanges. Not only would this improve the prospect
for their IPOs but also ensure better liquidity for their shares in
the future after listing.
It must be noted that the changes discussed above have only been
approved by the Government and are yet to be incorporated in
relevant Sectoral Regulations, FDI Policy and FEMA Regulations. In
other words, as a technical matter, they don't have legal
effect as yet. However, from past experience, unless the Government
itself revokes or amends these changes they are likely to be
adopted in the form approved.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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