Aman Nijhawan
During the past one year we have seen number of initiatives taken by Indian Government to boost the economy. Over the time, foreign investment limit in several sectors has also relaxed but still the inflows from overseas have not reached at its helm. Currently our FDI policy prescribes different caps and sub-limits under those caps for investment in several sectors. These sub-limits distinguish foreign investments as those made under foreign portfolio investment (FPI) route and foreign direct investment (FDI) route and specify a maximum cap for these.
These concerns were also expressed by Finance Minister in his Union Budget Speech, 2015[1] and he proposed to do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments and replace them with composite caps. On July 16, 2015 Union Cabinet has approved for introduction of composite cap as proposed in the Budget and on July 30 , 2015 DIPP, Ministry of Commerce and Industry has released a press note no.8 [2] through which amendments have been made in Consolidated FDI policy, 2015 (‘FDI policy’) which are effective from May 12, 2015. These amendments will be effective with immediate effect.
Composite Cap
Till now in several sectors there were sub-limits for FPI/FIIs and FDI within the overall cap of Foreign investment permitted. For example, in the commodity exchange, where overall FDI cap allowed was 49%, investment permitted by FPI was upto 23% and rest 26% through FDI. Subsequent to issuance of press note 8 of 2015, FPIs/FIIs can also invest up to the maximum permissible cap allowed in the relevant sector. All other conditions as stipulated under Consolidated FDI policy, 2015 for each sector to remain effective.
In the following sectors composite cap has been allowed:
| Sectors | Existing Cap | Amended Composite Cap |
| 6.2.18.4.2 Commodity exchanges | FDI + FPI/FII = 49%FDI= 26%; FPI[3]=23% | 49% |
| 6.2.18.5 Credit information Companies | FDI + FPI/FII = 74%FPI/FII[4] = 24% | 74% |
| 6.2.18.6 Infrastructure Companies in securities market[5] | FDI + FPI/FII = 49%FDI= 26%; FPI=23% | 49% |
| 6.2.20 Power exchanges | FDI + FPI/FII = 49%FDI= 26%; FPI[6]=23% | 49% |
Exceptions
The sub-limits for FPI/FIIs/NRIs/QFI have been merged with the composite caps in all sectors except banking and defence sectors which are kept outside the purview of the composite caps. In the banking sector foreign investment is allowed up to 74%, but portfolio investment by FII/FPI/QFI is allowed only up to 49%. While in the defence sector where foreign investment is allowed up to 49%, portfolio investment by FPI/FIIs/NRIs/QFI/FVCIs is allowed only up to 24%.
Existing Modes of Foreign Investment:
Impact of Composite Cap 
Needless to say introduction of composite FDI caps will not only increase FDI inflows into the country but will promote ease of doing business. Companies in such sectors will now have the flexibility to raise equity from overseas in any form up to the sectoral cap. Further, where the Government is inching its way to boost manufacturing within the country through its Make in India initiative, simplification and liberalization in the Foreign Investment Policy was the need of the hour. In essence introduction of composite caps are much welcomed move for increasing the flow of FDI into the country.
[1] https://taxguru.in/income-tax/budget-20152016-speech-arun-jaitley-minister-finance.html
[2] https://taxguru.in/rbi/composite-caps-simplification-fdi-policy-attract-foreign-investment.html
[3] Investment by Registered FII/FPI under Portfolio Investment Scheme (PIS)
[4] Investment by Registered FII/FPI under Portfolio Investment Scheme (PIS)
[5] namely stock exchanges, depositories and clearing corporations in stock markets
[6] Investment by Registered FII/FPI shall be restricted to secondary market purchase only.
(Author is associated with Vinod Kothari & Company and can be reached at [email protected])
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Related Press Release Dated-08.08.2015 is as follows :-
With the introduction of composite caps foreign investment shall include all types of foreign investments, direct and indirect, regardless of whether the said investments have been made under Schedule 1 (FDI), 2 [Foreign Institutional Investor(FII)], 2A [Foreign Portfolio Investor(FPI)], 3 [Non-Resident Indian(NRI)], 6 [Foreign Venture Capital Investor(FVCI)], 8 [A Qualified Foreign Investor(QFI)], 9[Limited Liability Partnership (LLP)] and 10 [Depository Receipts(DRs)] of Foreign Exchange Management Act (FEMA) (Transfer or Issue of Security by Persons Resident Outside India) Regulations. Foreign Currency Convertible Bond (FCCBs) and DRs having underlying of instruments which can be issued under Schedule 5, being in the nature of debt, shall not be treated as foreign investment. However, any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned as foreign investment. The measure is expected to bring clarity in FDI policy and boost foreign investment.
As regards misuse of the FDI policy and the monitoring mechanism, it is mentioned that RBI monitors the foreign investment inflows and specific violations of FDI policy are investigated by Enforcement Directorate.
This information was given by the Minister of State (Independent Charge) in the Ministry of Commerce & Industry Smt. Nirmala Sitharaman in a written reply in Lok Sabha today.
