With the Cabinet approving composite cap on all foreign investements including FDI, FII and NRI, banking stocks like Yes Bank and Axis Bank made a sharp upmove on Thursday's trade. Now there are clarifications from the Department of Industrial Policy and Promotion (DIPP) that no change is applicable to defence and banking sectors.
In defence, the FII cap which is at 24 percent stays, and for banking anything beyond 49 percent will require government approval. Similarly, for the insurance sector - the 49 percent composite cap stays and whenever the investment is stepped up from 26 percent to 49 percent, government nod will be required.
Pranav Sayta, Tax Partner, EY and Nishant Shah of ELP explain what does the decision mean. They also spoke about the Indo-Mauritius tax treaty.Below is the transcript of Nishant Shah & Pranav Sayta's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: Yesterday we saw the Yes Bank and an Axis Bank shares fly and today is a bit of profit taking that could be for any reason. How should be understand it for Yes Bank? With foreign institutional investors (FII) at 44 percent, do they just go to Foreign Investment Promotion Board (FIPB) for approval but after that approval their FII amount can go all the way to 74 percent. What do you think because they really don’t have much foreign direct investment (FDI) except a little bit of global depository receipt (GDR) if they go for it?Sayta: The way we understood this at least till yesterday evening was that, yes, if the approvals come through up to 74 percent foreign portfolio investments (FPI) investment is possible in the banking space. There is some confusion it seems and what we are hearing now is that the Department of Industrial Policy and Promotion (DIPP) will come up with a fresh clarification of exactly what they mean, but that the intention was not to bring about any change to the existing positions so far as the banking sector is concerned and so far as the defense sector is concerned. That is what we are hearing this morning. We have to wait and see, what exactly is the clarification that comes today?
Sonia: Is this your understanding too, that there is no change in the existing position of these two sectors banking and defense? Nishant Shah: I think, yesterday when the initial Cabinet approval had come through it was getting a feeling that now the offer cap would be 74 percent and the FII investments can go up to that. However, I think that the recent clarifications, which have been provided is seeming that there may not be any change on this, so long as the flexibility within the 49 percent overall cap which currently stands good. So, yes the understanding is exactly the same.
Latha: At the moment it is 49 percent allowed for FII and for FDI in banks. At 49 percent you have to go to the FIPB. Now obviously yesterday’s rule doesn’t change permission requirements, you have to go to the FIPB. But having gone to the FIPB is Yes Bank in a slightly better position? Sayta: Till yesterday evening as I said the impression we had was that so long as a government approval has been obtained to invest up to 74 percent FIIs FPIs will be permitted to invest up to 74 percent, the overall composite cap that was the impression that we got till late evening yesterday based on the announcements that had came yesterday. That, for banking sector subject to approval being obtained FIIs FPIs could invest up to 74 percent under the overall composite cap. This morning however, we are hearing that there was some confusion in the press release yesterday that there is some clarification that they will come up with which will come today. The DIPP will come up with the clarification but that in the banking and the defense sectors there is no change intended as per yesterday’s announcement. Then if that is the case then beyond 49 percent for FPIs FIIs will be difficult even under the approval route. We have to wait for today’s clarification. Hopefully things will be much clear after we get that clarification from the DIPP today.
Latha: Any other sectors that will benefit therefore? I mean removing defense and banking? Shah: Certain others sectors where they have opened up, say for example even in case of say aviation or in case of say print media, now they have opened up so it gives two flexibilities. One is from the investors; it will obviously encourage the investors to come in because now they can come in through portfolio investments. More importantly from the Indian entities perspective also there is flexibility into how they intend to structure the capital. The other sectors in relation with the select sectors that they have opened up or created the composite cap it would be benefited to the extent.
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