RBI Likely To Review FDI and FII Sectoral Caps

The gap between foreign direct investment (FDI) and foreign institutional investors (FIIs) will soon be removed in non sensitive sectors of the economy, while sensitive sectors like telecom and real estate in India may have a composite cap for foreign investment through FDI and FII.

Foreign institutional investment could be a peg higher than
FDI limits in non sensitive areas of the economy to encourage
smooth flow of funds.

If implemented, this move is likely to
affect sectors like DTH broadcasts, real estate and asset reconstruction
where industry specific conditions exist.

The government is likely to draw up a list of sensitive sectors
which may include real estate, media, asset reconstruction, infrastructure,
telecom and aviation.
While FDI upto 49% is allowed in the aviation sector, the RBI
recently allowed stocks beyond this limit to be picked up through
the secondary market by FIIs.

There are fundamental differences between FDI and FII – the objective of the two classes of investors being the most basic one.

While foreign direct investors are involved in the running of
a company, the aim of foreign institutional investors is solely
to maximize returns. Most experts are of the view that the two
categories are dissimilar and need to be treated differently.

The RBI’s proposal to review FII ceilings over and above the prescribed FDI sectoral caps is, therefore, well taken.

Photo: Mumbai, reserve bank of india 01 by Sailko, licensed under CC BY 3.0, via Wikimedia Commons.