The government is working on a proposal to introduce a new legislation relating to foreign investment aimed at removing the distinction between various categories of overseas capital, a move intended to ensure stability in policy and help Indian firms attract long-term capital.
According to a senior government official involved in conceptualising this proposed law, the new Foreign Direct Investment Act would seek to remove the distinction between various categories of overseas fund flows such as portfolio investment, venture capital, private equity and direct investment.
Rules on external investment in Indian companies make a distinction between portfolio investment, in which an investor buys shares of a company from the secondary market, and foreign direct investment (FDI), in which the investor normally acquires a relatively larger holding directly.
Another senior finance ministry official said the new legislation would involve major changes to the existing Foreign Exchange Management Act, or FEMA, which deals with both inbound and outbound foreign investment.
The official said the new legislation would remove all confusion and provide stability in terms of policy. The finance ministry has already started work on the new legislation and would seek inputs from the Reserve Bank (RBI) on it, the official said.
The new Act will also give clearer guidelines on convertibility, he added. Both spoke on condition of anonymity.
One view in the finance ministry is to use the new foreign investment act to stop discriminating against investments that take place through debt or quasi-debt instruments.
Such restrictions are often pointless, said the senior official involved in the process. “Capital will change clothes to become what you want it to become. Debt will masquerade as equity, equity can masquerade as debt,” he said.
India’s foreign investment norms prescribe separate caps on portfolio flows and FDI in some sectors, such as direct to home (DTH) broadcasting services and stock exchanges.
Press Notes have no legal sanctity
In other sectors, notably telecom and insurance, there is a composite cap of 74% and 26% respectively. In
many sectors 100% foreign investment is allowed. The plethora of rules lead to confusion and lack of clarity—a clear dampener to more overseas money flowing to firms which need long-term capital.
This is, of course, hardly the first time the government has tried to simplify India’s foreign investment regime. The difference this time is the proposal to bring in an act of Parliament instead of tinkering with the investment regime through executive orders.
An expert committee on foreign institutional investment (FII) had recommended in 2004 that foreign portfolio flows into a company should be separated from foreign direct investment (FDI) flows for policy purposes. FDI is categorised as the type of investment which results in ownership of 10% or more in a company and is relatively more enduring.
In portfolio investment, investors can exit more freely, through the stock exchanges. The RBI has consistently been of the view that in the hierarchy of preferred capital flows, FDI ought to be at the top. The current policy is largely ad hoc.
It is governed by several rules that are changed through so-called “Press Notes” issued from time to time by the Department of Industrial Policy and Promotion (DIPP) and FIPB. Interestingly, the official said the Press Notes issued by the DIPP have no legal sanctity since changes to guidelines on foreign investment require changes to FEMA rules, which
rarely gets done. Therefore, there is frequently considerable confusion regarding interpretation of policy on foreign investment between different government departments. This is what the proposed legislation seeks to address.
Source : The Economic Times