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Moves are afoot to relax the 24% cap for foreign investors, to improve FDI inflows. N Chandra Mohan reports.

A panel constituted by the Securities and Exchange Board of India (SEBI) is expected to recommend higher investment caps for foreign portfolio investors in its report later in April 2019. Currently, the aggregate limit for such investors cannot exceed 24% in a listed Indian company, and any further increase requires approval from the company’s board of directors. 

The panel, headed by HR Khan, a former deputy governor of the Reserve Bank of India (RBI), is considering removing the 24% limit and making the differing sectoral caps – which vary from 49% to 100% – under extant FDI rules as the new default ceiling, according to the Economic Times.

More liberal limits for portfolio investments are intended to give companies more flexibility to raise capital from foreign investors. The panel initially favoured merging the portfolio and FDI routes but this was opposed by the RBI as there are fundamental differences between the two. 

Unlike portfolio investments, FDI is relatively more stable as it enters with a longer-term horizon. The panel’s proposals, however, take forward policy decisions by the Indian government, including the recommendations by several committees over the past five years to remove the distinctions between different types of foreign investments and replace them with composite sectoral caps. 

To ensure fungibility of foreign investments, the panel is harmonising rules for portfolio investments and FDI for the usage of these funds, besides proposing uniform Know Your Client guidelines for portfolio, FDI and venture capital investors. There would also be reduced documentation for investors that are already regulated. 

As the panel’s higher investment caps raise the free float available for foreign portfolio investors in the country’s listed companies, it should improve inflows of foreign investments. It should also shore up the country’s weightage in free float-based global indices, such as the MSCI Emerging Markets Index. There are government concerns that this might reduce from May because the MSCI is including China’s A class shares, besides changing its methodology for calculating foreign ownership limits. 

A reduced weightage from 8.45% to 8.13% by November might lead to an outflow of portfolio investments from India. To ensure that this does not happen, SEBI must implement the panel’s recommendations at the earliest by May. 

N Chandra Mohan is an economics and business commentator based in New Delhi. 

This article is sourced from fDi Magazine
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