Composite Caps for Foreign Investment

Although liberalized over time,
caps on foreign investments in select sectors have been a hallmark of India’s
foreign investment policy. Added to this is the prescription of “sub-limits”
for specific types of foreign investment such as foreign portfolio investment
(FPI) and foreign direct investment (FDI). Currently, in several sectors there are
different caps for FPI and FDI. For example, in the banking sector, while there
is an overall foreign investment cap of 74%, FPI is capped at 49%. The rest of
the foreign investment must necessarily come in through FDI. This has resulted
in a complex regulatory regime that curbs the required flow of foreign
investment. In order to address concerns, in his Budget Speech in February 2015
the Finance Minister proposed
the abolition
of sub-limits (or caps) on different categories of investment
and the creation of an overall caps for foreign investment. Going by the
banking example, therefore, once introduced the total investment through either
the FPI or FDI routes (or both collectively) could be 74%.
The Union Cabinet yesterday
approved the change as proposed in the Budget, and made available further
details regarding the manner in which the composite caps will function. The
press release setting out the changes to the Consolidated FDI
Policy Circular of 2015
is available here.
The main function of this change is
to lump all types of foreign investment into one single category and to
obliterate any distinctions for the purpose of computing the sectoral caps. The
different categories included are:
– foreign direct
investment (FDI);
– foreign
institutional investment (FII);
– foreign
portfolio investment (FPI);
– non-resident
Indian investment (NRI);
– foreign venture
capital investment (FVCI);
– qualified
foreign institutional investment (QFI);
– limited
liability partnership investments (LLPs); and
– depository
receipts (DRs).
The outcome of this change is that
while certain categories of investors, primarily portfolio investors, were
subject to sub-limits, now they can invest up to the maximum permissible
composite cap in the relevant sector. This will therefore create additional
headroom for foreign investors, which the Government expects will result in
further inflow of investments into India. Although the Government’s press
release makes these changes uniformly applicable to all sectors, some media
reports (here
and here)
indicate that the banking and defences sectors are excluded from this new
dispensation. The Government needs to clarify this position.
The Cabinet decision consistent
with various efforts by the Government to ease the doing of business and also
to boost manufacturing within the country through its “Make in India” campaign.
The background to the press release sets out in great detail the intention of
the Government increasing investment flows into India, and seeks to demonstrate
the efforts it has already taken in the last year or so in liberalizing the
foreign investment policies by using some comparable data from the previous
At the same time, foreign
investment would be required to comply with various conditions prescribed in
specific sectors, and also with other laws and regulations as may be
applicable. Moreover, foreign investment in sectors that are under the Government
approval route will require such approval to be obtained if a transactions
results in a transfer of ownership and/or control of Indian entities from
resident Indian citizens to non-resident entities.
One change that could potentially
have significant implications is that “portfolio investment, upto aggregate
foreign investment level of 49%, will not be subject to either government
approval or compliance of sectoral conditions, as the case may be” so long as
ownership and/or control is not transferred to non-resident entities. This
would have an impact on sectors that are currently eligible for foreign
investment of less than 49%, that too under the Government route. Examples of
this include terrestrial broadcasting (FM radio), news and current affairs TV
channels and print media (news and current affairs) where foreign investment is
permitted up to 26% under the Government route. The implications of the present
change on these sectors are unclear. One interpretation (more aggressive) would
be that portfolio investment is now available up to 49% under the automatic
route, which effectively means that the new composite cap overrides the
erstwhile lower foreign investment limit. The other interpretation (more
conservative) would mean that the new regime applies only to scenarios where
foreign investment is otherwise allowed up to 49% or more, but that now it is
permitted under the automatic route rather than the Government route for
portfolio investment up to 49%. More clarity is awaited.
The press release further clarifies
(i)        the composite sectoral cap will consider
both direct and indirect foreign investment;
(ii)       sectors which are already under 100%
automatic route without conditionalities would be unaffected by the changes;
(iii)      foreign investments already made under the
existing policy to date would be unaffected, and will not require any changes
to be made.
While the Cabinet decision eases
and streamlines the foreign investment policy, some grey areas arise as a
result as discussed above. Given that the decision is to be implemented through
a Press Note to be issued by the Department of Industrial Policy and Promotion
(DIPP) that effectively amends the Consolidated Foreign Investment Policy,
including the sub-limits set out in various sectors indicated in Chapter 6
thereof, a more definitive picture is likely to emerge once that step is

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • I think the cabinet note is clear on this. Para 6.2 (vi) clearly says "total foreign investment, direct and indirect, in an entity will no exceed the sectoral/statutory cap"

    For example, if the investment limit is mentioned 26% in 'publication of newspaper and periodicals dealing with news and current affairs", the foreign investment cannot exceed 26% in that sector; and if the investment limit is mentioned 100% with government approval route (publishing/ printing of scientific journals etc), in this case, automatic portfolio investment (i.e., investment by entities under schedule 2, 2A and 3) is allowed upo 49% without any government approval.

    Please correct/ confirm my understanding.

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