FIIs permitted to invest 23% in Indian Commodity Exchanges without Government Approval

The updated Consolidated Foreign Direct Investment Policy Document released by the Commerce and Industry Ministry on 10 April 2012. The updated Consolidated Foreign Direct Investment Policy Document' changed the norms for both non-banking finance companies (NBFCs) and foreign institutional investors (FIIs).

The ministry through the document declared that Foreign institutional investors (FIIs) can invest up to 23 percent in Indian commodity exchanges without government approval. The updated Consolidated Foreign Direct Investment Policy Document also stated that import of second-hand capital goods will become tougher.

Composite foreign investment cap of 49 per cent (FDI limit of 26 per cent and FII ceiling of 23 per cent) in commodity exchanges which requires Government/Foreign Investment Promotion Board (FIPB) approval exists currently. However following the upgradation of Consolidated Foreign Direct Investment Policy Document, FIPB nod will be required only for the FDI component, not for FII investment.

The release of the upgraded Consolidated Foreign Direct Investment Policy Document was aimed at aligning the policy for foreign investment in commodity exchanges with that of other infrastructure companies in the securities markets, such as stock exchanges, depositories and clearing corporations.

Second-hand machinery

Currently issue of equity shares is allowed under the Government approval route for import of capital goods/ machinery/ equipment — including second-hand machinery subject to certain riders. The Union government took note of how the domestic capital goods sector (including the machine tools industry, construction and textile machinery) suffered as a result of import of cheaper and ‘sub-standard' second-hand machinery. The Union government thus excluded second-hand machinery from the purview of the policy to incentivise machinery with technology, compliant with international standards, in terms of being green, clean and energy-efficient.

The Government also clarified that the activity of leasing and finance (among the 18 NBFC activities where FDI is allowed) covers only financial leases and not operating leases.

Currently, 100 per cent foreign investment in NBFCs under the 18 heads is allowed through the automatic route (without FIPB nod). However, post the upgradation of the document operating lease activity in NBFCs will not come under the automatic route.

FII investment norms changed

FII investment norms were also changed. The Portfolio Investment Scheme currently limits the individual holding of an FII to 10 per cent of a company's capital and the aggregate for FII investment to 24 per cent.
It was decided to permit a company to increase the 24 per cent aggregate FII limit to the applicable (foreign investment) cap of the sector in which the company is operating, provided it is done through its Board resolution, followed by a general body special resolution.