As it tries to simplify investment norms for foreign capital, the finance ministry is set to follow a global benchmarks for foreign direct investments (FDI) and has also backed a new investor class of foreign portfolio investors to define cross-border investments of less than 10 per cent.
“We will be following the OECD principles that investment over 10 per cent will constitute FDI and be subject to controls,” said a senior official.
Accordingly, investments with less than 10 per cent stake would be considered as foreign institutional investment (FII).
This is the key recommendation of a panel led by department of economic affairs secretary Arvind Mayaram, which is set to meet over the next few days to finalise the modalities of the investor class.
The changes will have to be incorporated in the law, said another official, adding that it would require rewriting of the Foreign Exchange Management Act.
Aimed at differentiating from foreign direct investors, this new class of investors would include all other foreign capital classes including foreign institutional investors, portfolio investors, qualified foreign investors and non-resident investors.
Significantly, the KM Chandrasekhar committee in its report on rationalisation of investment routes that was submitted in June this year had also called for merging all cross-border transactions into a new investor class of foreign portfolio investors.
But it had kept the aggregate investment cap at 24 per cent, which is the same as the default limit for foreign institutional investors.
The Mayaram panel, which also includes representatives from market regulator Sebi and the Reserve Bank of India, was set up following a proposal in the Budget 2013-14 to distinguish between foreign direct investors and foreign institutional investors.
“Where an investor has a stake of 10 per cent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 per cent, it will be treated as FDI. A committee will be constituted to examine the application of the principle and to work out the details expeditiously,” finance minister P Chidambaram had said in his Budget speech.
The panel’s report is expected to give certainty to foreign investors and back India’s image as a credible investment definition at a time when the government is trying to finance the current account deficit.
Foreign investment flows into India through the FDI route rose by just six per cent year on year to $10.87 billion in the first six months of 2013.