Also refer to -

A committee on rationalization of definition of FDI (Foreign Direct Investment) and FII (Foreign Institutional Investment) to remove the ambiguity between the two constituted by Government of India under Chairmanship of Arvind Mayaram, Finance Secretary, GOI. The committee has submitted its report to the government. In the report committee has made recommendations

• to bring clarity in the categorization of foreign investment through FDI, FII and Foreign Venture Capital Investors
• as well as few changes to simplify the procedures so as to increase foreign inflows.

India lacks domestic capital to finance its infrastructural development projects, and thus it needs foreign capital to support economic growth. It is estimated that India needs about $ 1 trillion by March 2017 to overhaul infrastructure such as ports, airports and highways and boost growth. In pre-election period India witnessed reduced foreign inflows due to sluggish economy and unfriendly investment policies. However, a decisive mandate in the election improved the investors confidence expecting that major policy decision will be taken without any delay. Hence, the foreign investors directed their money towards India.

Foreign investment is essential to maintain Indias Balance of Payment and value of Rupee. Considering this fact, the then Finance minister Mr. P Chidambaram expressed the need of rationalizing definition of FDI and FII as per international standards. The Mayaram committee has worked on this issue and laid down few recommendations which are as follows:

Recommendations on Foreign Institutional Investment:

On the basis of recommendations by the K.M. Chandrasekhar Committee in Oct 2013, The Securities and Exchange Board of India (SEBI) had announced a new category of investors, called the FPI (Foreign Portfolio Investment), by merging the existing FIIs, sub-accounts and qualified foreign investors. The decision was taken to facilitate the Government, so as to bring more clarity and certainty while prescribing tax provisions for FPIs. Based on this recommendation Finance Ministry had immediately declared that tax benefits available to the FII would be transferred to FPIs.

What constitutes FPI?

Any investment by way of equity shares, compulsorily convertible preference shares/debentures less than 10 percent of the post-issue paid up equity capital of a company or less than 10 percent of the post-issue paid up value of each series of convertible debentures of a listed / to be listed Indian investee company by eligible foreign investors shall be treated as Foreign Portfolio Investment (FPI).

Investments by foreign investors under private placement /arrangement less than 10 percent of post issue paid up capital shall be treated as FPI. This would be subject to the transaction being undertaken at a price determined according to the SEBI (ICDR) Regulations.

Necessary checks and balances need to be placed to ensure that the Foreign Portfolio Investors do not act in concert or a single FPI investor does not circumvent the regulatory framework by splitting the investment or by acting in concert with others. This will need to be specifically ensured in the SEBI Regulatory framework for FPIs. In particular, FPI will be subject to the prevailing SEBI (SAST) Regulations.

The monitoring of the individual FPI limit of less than 10 percent will be done as hitherto by SEBI. The compliance with the FPI aggregate limit is as of now being done by RBI based on the reports of daily transactions of the FPIs (FIIs earlier) by their respective custodians, and this will continue.

Recommendations on Foreign Direct Investment:

What Constitutes FDI?

Foreign investment of 10 percent or more through eligible instruments made in an Indian listed company would be treated as FDI. All existing foreign investments below the threshold limit made under the FDI Route shall however, continue to be treated as FDI.

An investor may be allowed to invest below the 10 percent threshold and this can be treated as FDI subject to the condition that the FDI stake is raised to 10 percent or beyond within one year from the date of the first purchase. The obligation to do so will fall on the company. If the stake is not raised to 10% or above, then the investment shall be treated as portfolio investment.

[For example, Lets say Company needs a Rs 1000 Cr capital. Foreign investor X invests Rs 55 Cr initially. Then if X invests Rs 45 Cr more within a year (total 100 Cr, 10% of capital), then this investment will be treated as FDI. However, if X fails to invest total of 100 Cr, then his investment will be treated as FPI.]

In case an existing FDI falls to a level below 10 percent, it can continue to be treated as FDI without an obligation to restore it to 10% or more, as the original investment was an FDI.

Foreign Investment in an unlisted company irrespective of threshold limit may be treated as FDI.

[If this recommendation is implemented, it will solve the capital crunch issue for unlisted companies, which have only banks as an option to raise capital. Especially, Medium and Small companies will benefit which are not eligible to raise capital through public issues.]

In a particular company, an investor can hold the investments either under the FPI route or under the FDI route, but not both.

Recommendation on Foreign Venture Capital Investor:

The Committee recommends A separate team of SEBI, RBI and DEA to look into all the aspects of FVCI investment and rationalise the same.

Recommendations on NRI Investors:

There is a case for treating non-repatriable (money under this account can not be converted to foreign currency) investment as domestic and exempting it from FDI related conditions. The present reporting system of such transactions is not very robust, but it can be strengthened by RBI.

[If accepted, the recommendation would mean NRIs making investments of non-repatriable nature would not have to worry about sectoral restrictions and caps as well as government approvals needed for foreign investors if they wish to invest in Indian companies.]

NRIs have set up large businesses abroad and may prefer investing through corporate entities. Overseas Corporate Bodies was one such vehicle, but for various reasons, they have been derecognized in late 2003. With suitable safeguards and checks, this can be revived in a different form and NRI investments enhanced.

It should be the endeavor to simplify the classification of foreign investment and enable basically two classes of foreign investors in the long run viz. Portfolio Investors and FDI Investors, and at best carve outs therein for NRIs, in view of their special status.