India mulls easier norms for FPIs to take the FDI route, says DEA Secretary

Economic Affairs Secretary Ajay Seth

India may consider changes to make it easier for foreign portfolio investors (FPIs) to take the Foreign Direct Investment (FDI) route after they reach the 10 percent cap on investment in shares.

“At the moment foreign portfolio investment has to be less than 10 percent. Today, the moment an investor hits the 10 percent they would go back and offload into the market. But if someone wants to become a significant beneficial owner and cross that 10 percent and want to become FDI in a company, do we have a route? Of course, through the process of approvals. That is one of the things that can be facilitated,” Ajay Seth, Secretary, Department of Economic Affairs told Moneycontrol in an interview.

Seth clarifies this does not tantamount to a relaxation on the cap on FPI investment in equity shares, but is more a way to make it easier for an interested FPI to come on to the FDI regime.

This means that the distinction between the two - FDI and FPI, may become less pronounced.

Currently, Foreign Portfolio Investment refers to any investment made by a person resident outside India, in equity instruments where it is less than 10 percent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company or less than 10 percent of the paid-up value of each series of equity instruments of a listed Indian company.

On the other hand, FDI is the investment through equity instruments by a person resident outside India in an unlisted Indian company; or in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

The full Budget for 2024-25 proposed to simplify the norms around foreign direct investment (FDI) in a bid to attract more foreign inflows.

“The rules and regulations for foreign direct investment and overseas investments will be simplified to facilitate foreign direct investments, nudge prioritisation, and promote opportunities for using Indian Rupee as a currency for overseas investments,” Finance Minister Nirmala Sitharaman said in her Budget speech.

Another area, where the government may consider easier norms pertains to making it smoother for Indian companies with larger overseas investments to invest back into the country.

“Second area would be, say an Indian company might have made an overseas investment, the overseas company may have become a multinational company today, that company wants to invest back into India, do we have a smooth regime to come back? Is it an FDI? There are areas where we can improve rules and regulations,” Seth said.

Some of these steps will require changes to the Foreign Exchange Management Act (FEMA), Seth added.

Potential steps to attract more FDI flows into India come at a time when steeper interest rates in developed countries have led to investors preferring to invest abroad due to a higher opportunity cost.

Net FDI inflows to India declined from $42.0 billion during FY23 to $26.5 billion in FY24. However, in gross terms the moderation was by only 0.6 per cent in the previous fiscal year.