Composite Foreign Investment Cap not to cover Banking and Defence

Government’s decision to introduce composite foreign investment cap will not be extended to the two important sectors where foreign investment has additional ramifications – banking and defence. The composite foreign investment cap proposes to end the distinction between FDI and FPI in determining foreign investment in domestic companies.

Foreign investment in most sectors was expressed as FDI and separate limits were set for FPI or FII, within the FDI limits.

Defence foreign investment is limited to 49% in the normal case and foreign investment in Indian private sector banks is allowed up to 74%. As per norms, in the defence sector, FPI is limited to 24%, whereas in the banking sector it is restricted to 49%.

The government has clarified that individual sub-limits in both sectors will continue as part of the composite foreign investment policy.

End of the distinction between FDI and FPI means that either FDI or FPI in full or any combination between the two can be allowed up to the set overall limits. FPI includes mainly FII and QFI.

The composite foreign investment policy is adopted as part of the easing of doing initiative.

“When you have different categories of caps, it leads to a situation where the person who is investing is confused or has to do much more due to diligence to see that he doesn’t exceed the given limits. The person receiving the investment is also constantly watchful”, said Commerce and Industry Minister Niramala Sitharaman. She told that it is important to treat all foreign investment with parity.

For the banking sector, FPI up to 49% is allowed under the approval route with compliance of sectoral conditions. An important clause is that the ownership and control of the banks should lie with resident Indian citizens.

Banking sector FDI is a complex scenario. Already, foreign investment in many Indian private sector banks is above 50%, and in some cases near to 72%; with the ownership and control remains in Indian hands.