DIPP faces flak on proposal of composite caps for foreign investments.

NEW DELHI: The department of industrial policy & promotion's move to have composite caps for all foreign investment has run into rough weather, with many departments picking holes in the proposal.

DIPP has moved a cabinet note proposing introduction of composite foreign investment caps encompassing foreign portfolio investment, NRI investment, depository receipts, foreign currency convertible bonds and fully and mandatorily convertible preference shares or debentures.

As per the draft note, mooted in July, in sectors with caps, government approval will be required where a foreign owned or controlled company is being set up, or control or ownership of Indian firm is being passed into foreign hands. This implies that in case of investment in brownfield pharma any FII or FPI investment beyond 24% will require government approval and will need to comply with performance-linked conditions imposed on the sector.

In sectors other than brownfield pharma any FII or FPI investment beyond 49% will be required to go through government route and performance-linked conditions will apply. Portfolio investments are not strategic investments as investors do not play any role in the day-to-day management of a company.

India allows up to 24% portfolio investment in all sectors that can be raised to the sectoral cap with a special resolution by company board and shareholders. Individual foreign institutional investor can have only up to 10% in a firm. Certain sectors — construction, multi-brand retail trade and brownfield pharma — have performance related conditions and require government approval.

While DIPP hopes the proposal will help remove ambiguity on conditionality and sectoral caps, many departments have found it to be very complex. The department of economic affairs, under the finance ministry, has strongly opposed bringing portfolio investments under the approval route as these are not strategic flows.

Portfolio investments are monitored by the RBI. Interestingly, DEA had proposed composite caps, including all forms of foreign investment, in a draft note for deliberations of Arvind Mayaram committee on FDI/FII definition but had to withdraw it following DIPP's objections.

But DEA did not moot prior government nod for FIIs, the reason for its opposition. DEA does not want any retrograde policy measure to hamper the sentiment. Moreover, it is of the view that bringing portfolio flows on government approval route is against the logic of having such flows.

However, a DIPP official added, "Departments have made certain suggestions and we are willing to incorporate those."

It feels the policy allows space for subverting sectoral caps and non-adherence to performance linked conditions prescribed in some sectors such as pharma, and certain checks need to be put in place.

Source : economictimes.indiatimes.com