The Reserve Bank of India (RBI) on Monday effectively eased the capital controls on foreign portfolio investors (FPIs), by allowing them to transition into foreign direct investment (FDI) smoothly under a new operational framework.
While FPI by a single investor or investor group in an Indian listed company will continue to be capped at 10%, any such entity wanting to raise the holding will now have the option of turning the entire investments into FDI without having to divest the extant stake, and coming in via the FDI route afresh.
The facility would, however, be subject to the conditions specified by the RBI and the Sebi within five trading days from the date of settlement of the trades causing the breach, the central bank said. Also, the FPI will have to take necessary approvals from the government and concurrence of the Indian investee company concerned.
Analysts are divided on whether the move would encourage capital inflows into the country or whether it will promote a shift from short-term speculative investments typical of FPIs to more stable, long-term commitments associated with FDIs.
While many believe that the easier reclassification of FPI into FDI would lead to increased capital inflow into productive sectors of the economy, and capital formation, others cited the fact that the investee companies may not give their nod in most cases for such smooth transition.
According to Nagesh Kumar, member of the RBI’s Monetary Policy Committee, allowing FPI investors to go beyond 10% of capital “may lead to several major Indian companies coming under the control of speculators.” He said the move amounted to giving equal treatment to FDI and FPI, and called it “unwarranted.”
The RBI’s move is line with the report of the Arvind Mayaram Committee, which, following an announcement in Budget FY14 to remove the ambiguity in the definitions of foreign investments, recommended that such investment of 10% or more in a listed company be treated as FDI.
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Mayank Arora, Director-Regulatory Nangia Anderson said it is unlikely that the move would have a big impact on FDI numbers, which remained subdued in the last two years. “It has been going around for some time.
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