To boost FDI inflows, India’s National Democratic Alliance (NDA) government has approved a composite cap for foreign investments in Indian companies. The policy does away with the distinction between various forms of investment, such as FDI, portfolio, non-resident Indians investments and venture capital. The objective is to remove sub-ceilings for multiple investment categories and simplify norms for foreign investments. According to finance minister Arun Jaitley: “From now, all FIIs [foreign institutional investors], NRIs [non-resident Indians] and other foreign investments will be clubbed… It will be constituted as a composite cap.” 

The latest policy benefits companies in single-brand retail, credit information business, and commodity and power exchanges. For instance, in commodity and power exchanges, the FDI limit previously was 26%, while portfolio investments were capped at 23%. With a composite cap, portfolio investments can now go up to the permissible sectoral limit of 49%. The composite cap thus provides the advantage of fungibility of all foreign investments subject to the sectoral limit. FDI already made in accordance with the existing policy does not have to conform to this latest amendment.

The only exceptions to the policy are banks and the defence sector. Total foreign investment allowed in the banking sector is up to 74% of the paid-up capital, while the permissible limits through FIIs, portfolio investors, NRIs is 24%, which can go up to 49% through a special resolution passed by the bank’s board. The composite cap does not change this position. Bankers, however, initially thought they would benefit from the move as they felt they can now go up to 74% with portfolio investments, leading to avoidable confusion on the matter, and banking stocks rose handsomely on this announcement by the government. 

Similarly, in defence, the overall FDI limit is 49% while investments by portfolio investors, NRIS and FIIs together cannot exceed 24%. These limits remain. Banking and defence have been exempt from the new norms to prevent disruptions in these strategic sectors. At an event jointly organised by commerce ministry, World Intellectual Property Organisation and industry chamber Ficci, commerce minister, Nirmala Sitharaman, stated: "In defence, as regards the cap which prevailed for FII and in banking, particularly the private sector banking, on FIIs... in those two specific areas, specific sub-caps will prevail... We do not want fly-by-night operators or quick money coming in or going out."