In a major overhaul of foreign investment rules, the government is readying a new set of definitions for overseas investors that will classify all overseas investors into two categories — foreign direct investment (FDI) and foreign portfolio investment (FPI).
Overseas investment with an equity stake in any company of below 10% would be categorised as FPI — merging the two earlier classifications of foreign institutional investors (FIIs) and qualified foreign investors (QFIs).
Any individual investment above 10%, according to the proposal, will be treated as FDI.
These are part of the recommendations that a panel headed by economic affairs secretary Arvind Mayaram has finalised to make India’s foreign investment rules less ambiguous.
The committee was set up after finance minister P Chidambaram in his 2013-14 Budget speech had proposed to follow the international practice for definitions of FDI and FIIs.
Under the new definition, expected to be adopted shortly, portfolio investment by a single investor shall not exceed 10% in an initial public offer, a follow-on public offering or a qualified institutional placement (QIP) of a soon-to-be-listed company.
The Mayaram panel has also recommended placing the onus of compliance with FPI aggregate limit from the Reserve Bank of India to investee companies through “share transfer agents.”
“It is worth exploring if these entities can be called upon by Sebi, or by the company itself to perform this role,” a source said.
It has also recommended a series of rules to prevent split investments stating that an investor in a company can hold investments either under FPI or FDI route, but cannot make investments under both routes.
“Concerns have been expressed as to the treatment to be given to split investments,” the source said. “Necessary checks and balances need to be placed to ensure that a single FPI investor does not circumvent regulatory framework by splitting the investment or by acting in concert,” the source said.