Composite Caps for Foreign Investment Formalized

We had earlier
the Union Cabinet’s decision to create composite caps for foreign
investment under various categories. That decision has now been formalized in
the form of Press
Note No. 8 of 2015
issued by the Department of Industrial Policy &
Promotion, Government of India (“DIPP”).
In the previous post, we had
highlighted two outstanding issues from the Cabinet decision that were left
somewhat ambiguous. They have now been clarified in the Press Note.
The first issue relates to whether
composite caps apply to the banking and defence sectors. Although the press
release of the Cabinet decision seemed to include all sectors within the
composite caps, subsequent press reports based on ministerial announcements
suggested that the banking and defence sectors were to be kept outside the
purview of the composite caps. That has now been confirmed in the Press Note. In
the banking sector (in item, foreign investment is allowed up to 74%,
but foreign portfolio investment is allowed only up to 49%. In the defence
sector (in item, foreign investment is allowed up to 49%, but
portfolio investment only up to 24%).
The second issue arose because the
Cabinet decision specified 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 were somewhat unclear. Now, Press Note clarifies that portfolio
investment under the automatic route is available “upto aggregate foreign investment
level of 49% or sectoral/statutory cap, whichever is lower”. Hence, in case of
sectors where overall foreign investment is allowed up to less than 49%, that
lower limit will continue to apply.

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.

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