Threshold limit under the portfolio investment scheme enhanced

The Reserve Bank of India ("RBI") has taken another step towards making the inbound investments into India more attractive for foreign investors. On April 19, 2003, the RBI enhanced the threshold limit under the portfolio investment scheme for Foreign Institutional Investors ("FIIs") and Non Resident Indians ("NRIs") investments in large Indian companies having an equity base of INR 10 billion and above.

FIIs / NRIs desiring to invest into such large Indian companies need to seek prior approval of the RBI as soon as the existing FII/NIR investments in the Indian company approach the threshold limit. Prior to this announcement, the threshold limit was pegged at 2% points below the sectoral cap applicable to the industry in which the Indian company operates. As per the recent announcement, the RBI has enhanced this threshold limit to 0.5% points below the sectoral cap, thus, effectively providing a 1.5% points investment leverage to the Indian companies prior to the RBI stepping in. This amendment can be better understood with the help of the following example:

Let us assume that Company X is a telecom services company and hence the applicable sectoral cap, as per the foreign direct investment guidelines, is 49%. Its total paid-up equity capital consists of 100,000,000 shares of INR 10 each, out of which the foreign investors hold 47,000,000 (i.e. 47% of the total equity capital). Under the earlier system, the foreign investors would have had to seek prior clearance of the RBI to purchase any share in excess of 47,000,000 (i.e. 47% which is 2% points below the sectoral cap of 49%) in Company X. As per the revised limits, the foreign investors can now purchase additional 1,500,000 shares of Company X (i.e. 48.5% which is 0.5% points below the sectoral cap of 49% applicable to Company X).

This announcement is aimed at further liberalization and to facilitate increased floating stock of shares of large Indian companies.

Further, it would be pertinent to note that at the time of presenting the Finance Bill 2003, Indian Finance Minister, Mr. Jaswant Singh, had announced that the process of registration for FIIs would be streamlined to ease their entry into the Indian stock markets. The Securities Exchange Board of India ("SEBI") has taken up talks with the RBI in this regard. The changes are likely to be in relation to drastically shortening the period for receiving the FII registration certificate from SEBI after filing of the complete application. Currently, the processing of the application takes around a fortnight. However, no amendments are expected in the registration requirements, per se.

Source: The Business Line, April 19-20, 2003 and RBI Press Release dated April 19, 2003.