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RBI wants government to simplify foreign investment regime

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The Reserve Bank of India has dashed off a proposal to the finance ministry to simplify the country's foreign investment regime, hoping that the new team at the North Block would expeditiously consider the suggestion gathering dust for years. The central bank has suggested any foreign investment in a company in excess of 10% of its shares should be considered FDI and less than that as portfolio investment, a government official privy to the development told ET. The proposal would be part of a single window framework for all Qualified Financial Investors (QFI) that want to invest through the portfolio route, providing a simple structure for foreign investors to invest in Indian companies. The RBI is keen to spur capital flows to fund India's current account deficit that worsened to 4.2% of GDP in 2011-12, causing the rupee to depreciate sharply. The suggestions are based largely on recommendations of a working group headed by Sebi chairman UK Sinha on foreign investment of 2010 and Ashok Lahiri Committee of 2004. Such a simple distinction between FDI and portfolio investments is in keeping with the practice in a number of countries such as Brazil and South Africa and is also an OECD standard. In contrast, India has a complicated regime that has a different policy framework for different types of investors even though they all may be buying shares in a company.
This move will simplify the foreign investments regime and will obviate the need for obtaining these multiple approvals and registrations and consequential ongoing monitoring by the regulators," said Punit Shah, partner - tax & regulatory services, KPMG. The timing of the letter, sent barely days ahead of P Chidambaram taking over as the finance minister, seems just right as reviving investments tops the current finance minister's agenda. The RBI has proposed that distinctions between various forms of foreign investors such as foreign institutional investors, foreign venture capital investors, private equity or non-resident Indians be done away with and replaced with Qualified Foreign Investor or QFI framework. Though, India created a QFI framework, this is a separate class of investors who have been allowed to invest directly in shares, bonds and mutual funds- largely individuals, pension funds and trusts. Sinha panel had suggested any foreign investment above 10% be treated as FDI and below 10% as QFI adding that there was no reason for policy to prefer one over the other. The RBI now wants the government to follow this approach and also align regulatory policies in line with it. The proposal will help clear confusion over FDI and FII limits in restricted sectors and how they should be counted.
Source: Economic Times

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