In order to regulate hot money from entering India and increase the transparency of foreign funds the Department of Industrial Policy and Promotion (DIPP) has issued a new rule. Henceforth, while investing in India, individual FII’s will have follow the rules applicable to portfolio investors even if they are investing through the foreign direct investment route. As a result FII’s will be limited to picking up only 10 percent equity of an Indian company, as against 100 percent previously permitted.

According to regulations laid down by the DIPP, FIIs can invest in Indian companies through two routes – a portfolio investment route or secondary market purchases and foreign direct investment route.

Under the portfolio route FIIs can individually acquire up to 10 percent equity in an Indian company though the aggregate FII limit is pegged at 24 percent. The limit can, however, be raised after securing board’s approval in sectors where 100 percent FDI is allowed.

The DIPP has now clarified that the same rule will apply if FIIs come through the FDI route. They can not pick up more than 10 percent stake in a company even if their investments are treated as FDI and that such investment should not be more than 24 percent of the total equity.

“It is more restrictive as 10 percent limit is lesser than FDI caps in most sectors”. This also brings the issue of composite foreign investment caps to the fore that the finance ministry has been pitching for,” Punit Shah, leader, financial services tax practice, KPMG, told the Economic Times.

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