Budget 2019: This Is How The Government Plans To Draw In More Foreign Investment
Government seeks to bring in large volumes of foreign investments. This is the proposal on how..
Investment is key, the government reiterated it in the economic survey as well as in the budget this year.
Here are the changes proposed by the government to draw in more investments:
Key Takeaways For Foreign Portfolio Investment and Foreign Direct Investment:
- Local-sourcing norms to be relaxed for single-brand retail.
- Government to open FDI in aviation, insurance, animation and media.
- FPI to be allowed to subscribe to real estate investment trusts’ debt securities.
- Non-resident Indian portfolio route to be merged with FPI.
- Existing KYC norms for FPIs to be simplified in the interest of making it more investor friendly; align investment sectoral caps
FDI refers to investment by non-resident entities or individuals in an unlisted Indian company, or 10 percent or more in a listed Indian company. On the other hand, FPI means any investment in a listed company made by a person residing outside India, where such an investment is less than 10 percent shareholding of the listed Indian company.
FDI Relaxation
According to Budget 2019:
- Government will examine suggestions of further opening up of FDI in aviation, media (animation, AVGC) and insurance sectors.
- 100 percent foreign direct investment will be permitted for insurance intermediaries.
- Local-sourcing norms will be eased for FDI in single-brand retail.
Of this, the industry is most happy with the sourcing norms. “The potential relaxation on sourcing norms for FDI in retail will be the most-awaited and very welcome measure,” Sameer Sah, partner at Khaitan & Co told BloombergQuint. The relaxation, Sah said, will encourage clients to set up wholly-owned entities. “Many manufacturers, before they actually use India for manufacturing, look to first import finished products and sell them in India through wholly-owned entities.”
This, according to Sah, has not been possible thus far for everyone owing in part to the sourcing norms. “This proposed relaxation is likely to benefit the Make In India story.”
Sah said it was heartening to see insurance intermediaries and insurance companies being looked at differently from an FDI perspective. “Insurance intermediaries and insurance companies are two completely different sets of businesses. There are completely different capital adequacy and other regulatory concerns in respect of both.”
Key FPI Proposals
A key change proposed in the budget was to increase the statutory limit for FPI investment in a company from 24 percent to sectoral foreign investment limit under FDI policy. Although an option is given to companies receiving foreign investment to limit it to a lower threshold.
FPI investment limit is presently capped at 10 percent for each individual entity, and 24 percent for all FPIs for a listed company (unless increased to sectoral limits by a shareholder resolution). FPI is allowed to trade on stock exchanges, as opposed to FDI.
The move to increase investment limit flows from the HR Khan committee report’s recommendations. This will help create headroom for FPI investment in companies that fall within higher sectoral cap for FDI but haven’t passed the resolution to formally increase the FPI limit from 24 percent to sectoral cap. Hence, now no action (by way of resolution) from company required and FPIs can invest upto sectoral cap.Shagoofa Khan, Partner, Cyril Amarchand Mangaldas
FPI May Partake In ReITs and InvITs’ Debt Securities
FPIs are also proposed to be permitted to subscribe to listed debt securities issued by ReITs and Infrastructure Investment trusts (InvITs).
While the Securities and Exchange Board of India had operationalised issue of debt securities under InvIt and ReIT regulations, raising financing from FPIs hit a snag due to restrictions under the FPI regulations as only debentures of corporate issuers are permitted whereas InvITs and ReITs are organised as trusts, Khan said, adding that it is now proposed to align the FPI regulations and permit FPIs to subscribe to debt securities issued by these trusts.
Removing the inconsistency between the FPI regulations and InVIT/ReIT regulations reiterates the government’s commitment to facilitate monetisation of infrastructure assets, she said.
NRI-FPI Merger
In order to provide NRIs with seamless access to Indian equities, the budget proposed that NRI portfolio investment scheme route be merged with the foreign portfolio investment route.
Merger of NRI and FPI route is a very progressive move and is the adoption of one of the key recommendations of HR Khan committee. This should help in bringing much larger pools of NRI capital through pooled and professionally-managed structures. The cap of 10 percent which exists on NRI participation through the FPI route had received serious pushback from global fund managers and so, this proposal should be received by the investment managers very positively. The key is how seamlessly this merger is accomplished. The transition of control on PIS regime from RBI to SEBI for FPI would require the two regulators to work in tandem to ensure a smooth transition.Siddharth Shah, Partner, Khaitan & Co
The government wants to improve the KYC norms for FPIs to make it more investor friendly without “compromising the integrity of cross-border capital flows”.
While it’s not clear exactly what they wish to do here, but one would hope that the proposal removes ambiguity around heightened KYC for “high-risk jurisdictions” by clearly setting out which countries would be regarded as high risk, Khan said.