The finance ministry has blocked a proposal from the department of industrial policy and promotion (DIPP) to allow foreign institutional investors (FII) to invest over and above the sectoral caps on foreign investment. FII stake should not be taken into consideration while calculating FDI in sectors, for example telecom, which have a foreign investment cap, the department had suggested.
Several other departments also have reservations on the issue which is snowballing into a controversy, government sources said. Already, there are varying opinions over differences between FDI and portfolio investments, especially in a sector like real estate.
The proposal has huge implications for the telecom sector, stock exchanges, commodity exchanges, asset reconstruction companies and broadcasting, to name a few. In the telecom sector, overall FDI cap of 74% includes FDI, FII, and NRI stake, while in the asset reconstruction sector only FDI is permitted. In different segments of broadcasting, foreign investment limits include both FDI and FII.
The home, defence and external affairs ministries have reservations on allowing FII investment over and above FDI, government sources said. This could lead to a demand for hiking the foreign investment cap in sectors like telecom and stock exchanges, it is felt. It is learnt that national security advisor M K Narayanan also does not favour such a move. These ministries have demanded that the proposal should be shelved. The resistance has stalled the proposal from progressing further.
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Even before the globally-popular real estate mutual funds (REMF) take off here, RBI has raised a red flag. It has argued that the funds would lead to circumvention of foreign direct investment (FDI) in real estate that places restrictions on foreign investors. Although 100% FDI is allowed in realty projects on the automatic route, the conditions have to be adhered to. The banking regulator has said it amounted to indirect flow of FDI in violation of the spirit of the conditions laid down by the government. RBI now wants the government to take up the issue with market regulator Sebi which had issued the guidelines on REMFs about two months ago. As per the Sebi guidelines, REMFs can directly invest in real estate, in mortgage-backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. However, it has mandated that at least 35% of net assets of the scheme should be invested directly in realty assets. The much-awaited scheme has not found takers but some fund houses are working on the scheme. RBI’s concerns about flow of foreign investment in realty are not new. It had earlier written to the government to make Foreign Investment Promotion Board’s clearance mandatory for FDI into the sector.For more view- realtydigest.blogspot.com