News: RBI, finmin seek clear definition on FDI, FIIs
(TNN 31/10/2006) New Delhi - With foreign investments in critical sectors becoming a controversial issue, RBI and finance ministry have asked the department of industrial planning and promotion to define FDI and FII unambiguously.
The initiative also comes close on the government's plans to enhance the limits for foreign investment in some of the key financial key sectors.
The definition change could have a large scale impact on how foreign investors tap into the growing Indian story. As per current guidelines, FIIs can invest only up to 24% in a company. Further investments would need special approval from the company's board and in any case cannot go beyond the foreign investment cap for the sector, set by the government.
Sources said RBI has written to the department of industrial promotion, which is the nodal arm of the government to decide on foreign investment policy. The issue has also been flagged off by the finance ministry. The lack of clarity in the definitions has become a major issue in sectors like telecom. More recently, it was highlighted in the real estate sector too. In this sector, it was the categorisation of the pre-initial public offer foreign institutional investment which had caused the confusion.
The issue has been debated in the case of opening up the asset reconstruction business and that of stock exchanges. Even for sectors like insurance, where the government is considering raising the foreign investment cap to 49%, there is ambiguity about whether FII investment should be subsumed in it.
While it is the market regulator Sebi, which decides who is an FII, the guidelines from the DIPP could affect FIPB clearance for FDI in various sectors. The finance ministry-appointed Lahiri committee had pointed out that India has basically adopted the IMF definition of FDI, as an investor which picks up more than 10% stake in a company's equity.
The committee report submitted last year had also said there was no reason to prefer one over the other. As an interim measure it suggested that the FII investment in a company should be over and above the FDI limit.
According to Vivek Mehra, executive director of PricewaterhouseCoopers, there are clear distinct windows under government regulations for foreign investment.
"There is a separate window for FIIs. The window is separate as the FII investment supposedly gives a non-controlling stake from market purchases. In the same way there is non-resident Indian repatriable and non-repatriable windows. Unfortunately on the administrative front, these windows get blurred. There is lack of clarity. When there is a cap, it basically applies only to the FDI window unless it is mentioned otherwise,” he said.
The initiative also comes close on the government's plans to enhance the limits for foreign investment in some of the key financial key sectors.
The definition change could have a large scale impact on how foreign investors tap into the growing Indian story. As per current guidelines, FIIs can invest only up to 24% in a company. Further investments would need special approval from the company's board and in any case cannot go beyond the foreign investment cap for the sector, set by the government.
Sources said RBI has written to the department of industrial promotion, which is the nodal arm of the government to decide on foreign investment policy. The issue has also been flagged off by the finance ministry. The lack of clarity in the definitions has become a major issue in sectors like telecom. More recently, it was highlighted in the real estate sector too. In this sector, it was the categorisation of the pre-initial public offer foreign institutional investment which had caused the confusion.
The issue has been debated in the case of opening up the asset reconstruction business and that of stock exchanges. Even for sectors like insurance, where the government is considering raising the foreign investment cap to 49%, there is ambiguity about whether FII investment should be subsumed in it.
While it is the market regulator Sebi, which decides who is an FII, the guidelines from the DIPP could affect FIPB clearance for FDI in various sectors. The finance ministry-appointed Lahiri committee had pointed out that India has basically adopted the IMF definition of FDI, as an investor which picks up more than 10% stake in a company's equity.
The committee report submitted last year had also said there was no reason to prefer one over the other. As an interim measure it suggested that the FII investment in a company should be over and above the FDI limit.
According to Vivek Mehra, executive director of PricewaterhouseCoopers, there are clear distinct windows under government regulations for foreign investment.
"There is a separate window for FIIs. The window is separate as the FII investment supposedly gives a non-controlling stake from market purchases. In the same way there is non-resident Indian repatriable and non-repatriable windows. Unfortunately on the administrative front, these windows get blurred. There is lack of clarity. When there is a cap, it basically applies only to the FDI window unless it is mentioned otherwise,” he said.
posted by InCar Group Press Room at 18:27
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