The Government of India, through a press release dated July 16, 2015, has introduced composite caps for simplification of FDI policy. These changes were alluded to by the finance minister during the presentation of the union budget in February 2015. Consequent to the change, foreign investors can invest in Indian companies till the applicable sectoral cap, irrespective of whether the investments are made by an FDI entity or by an FPI or an NRI, QFI, LLPs or through depository receipts, unless provided otherwise. However, the last three words of the previous sentence have created tremendous confusion, with experts claiming that the press release does not introduce any change at all. For instance, the composite sectoral cap for foreign investment in the defence sector has been limited to 49% within which, there is a maximum sub-limit of 24% for portfolio investments by FPI/FIIs/NRIs/QFIs/FVCIs under the automatic route. Such sub-limits have also been prescribed for the banking sector, commodity exchanges, infrastructure companies in securities markets, etc. and if one were to take a conservative view of the press release, existing position is maintained in the aforementioned sectors. However, in sectors having no sub-limits, portfolio investment upto 49% is allowed, without any requirement of seeking government approval or compliance with sectoral conditions, if such investment does not result in transfer of ownership and/or control to non-resident entities. This would benefit sectors like pharmaceuticals and multi-brand retail where FDI investors need to comply with stringent conditions.
The press release also clarifies that FCCBs and DRs having underlying instruments, being in the nature of debt, issued under Schedule 5 of FEMA 20, shall not be treated as foreign investment. Earlier, FCCB holdings were also considered for calculating total foreign investment in the company. However, FCCBs will now be counted towards calculating foreign investment only at the time of their conversion into equity, not at the time of issuance of FCCBs. This will give companies more headroom for attracting foreign investment.