The Government is planning to write in a trigger mechanism that will free foreign Institutional investors (FIIs) from hassles if their investments breach any sector-specific foreign direct investment (FDI) cap by less than 1 per cent. This means that FIIs will have to report to the RBI any violation of sectoral caps only when their investments in an Indian company cross FDI limits.
The mechanism may ease business rules for both FIIs and Indian companies. They have to keep a close watch on transactions in equity markets to ensure that there is no breach of sectoral caps. This is often difficult to sift from the aggregate volume of share transactions in any company on a daily basis.
According to government sources, the new rules will consider any share purchase by an FII through the stock market as FDI only if such a purchase constitutes more than 1 per cent of the total equity of a company. In addition, FIIs will be asked to provide the details of the beneficial owners. But FII investments will not be counted daily for this purpose. Instead, the government will consider shareholdings on March 31 to determine holding patterns.
The government’s plans will benefit sectors like new media, telecom, aviation, insurance and banking. These sectors allow different combinations of FIIs and FDI to determine the sectoral cap.
