Seeking to remove ambiguity on the distinction between foreign direct investment and foreign institutional investment, the government has proposed to follow international practices for differentiating them.
“In order to remove the ambiguity that prevails on what is foreign direct investment (FDI) and what is foreign institutional investment (FII), I propose to follow the international practice,” said finance minister P Chidambaram in his Budget speech.
He laid down a broad principle under which an investor with a stake of 10% or less in a company will be treated as an FII. An investor with a stake of more than 10% will be treated as FDI.
A committee will be constituted to examine the application of the principle and to work out the details.
“The proposed change in FDI and FII regime will entail detailed examination of all SEBI and FEMA and listing regulations to ensure that it is implemented in an appropriate manner,” said Punit Shah, co-head of tax, KPMG India.
“All these laws will need to be amended to ensure that the spirit of the law is preserved. The impact on the current investments will also have to be carefully considered,” he said.