Foreign investment, comprising, amongst others, foreign direct investment (FDI) and portfolio investment, in India is regulated by the (Indian) Foreign Exchange Management Act, 1999 (FEMA). Additionally, the Government of India, from time to time, notifies its policy on FDI and prescribes the sectoral caps and other conditions for FDI (FDI Policy). The FDI Policy is adopted by the Reserve Bank of India (RBI), regulator for foreign exchange transactions, and notified under relevant regulations under FEMA (FEMA Regulations). These regulations are subject to sectoral guidelines issued by regulator/ministry of the relevant sector from time to time (Sectoral Regulations).
The FDI Policy and Sectoral Regulations have been progressively liberalized to permit foreign investment in most sectors. In continuing with its policy of liberalising foreign investment into India, the Government has recently further relaxed foreign investment into Indian stock exchanges. An Indian stock exchange is a stock exchange that meets the conditions stated in the securities regulations and has been recognised by the securities market regulator.
Current Situation
The existing Sectoral Regulations for securities market prohibit residents (except select resident institutions) and non-residents from (directly or indirectly either individually or together with persons acting in concert) acquiring or holding more than 5% of the paid up equity share capital in an Indian stock exchange.
These select resident institutions, which are permitted to hold more than 5%, are (a) a stock exchange; (b) a depository; (c) a banking company; (d) an insurance company; and (e) a public financial institution. They are permitted to acquire or hold (either individually or together with persons acting in concert) up to 15% of the paid up equity share capital in an Indian stock exchange.
Liberalisation
The Government has approved changes to Sectoral Regulations applicable to Indian stock exchanges. This follows the Government announcement during presentation of the Union Budget earlier this year, for raising the foreign/non-resident shareholding limit in Indian stock exchange from 5% to 15%.
The Government has now permitted select non-resident institutions, namely (i) a stock exchange; (ii) a depository; (iii) a banking company; (iv) an insurance company; and (v) a commodity derivative exchange, to hold up to 15% shareholding in Indian stock exchanges. This brings these non-resident institutions at par with domestic institutions which were already allowed to invest up to 15% in Indian stock exchanges.
It is pertinent to note that overall ceiling for foreign investment in Indian stock exchanges continues to remain 49%.
Other Changes
As per the existing Sectoral Regulations and FDI Policy, foreign portfolio investors are permitted to acquire shares of an Indian stock exchange only through the secondary market. The Government has now permitted foreign portfolio investors to acquire shares through initial allotment, in addition to the secondary market route.
Way Forward
This liberalisation was a long standing demand of the Indian stock exchanges. The existing foreign ownership limits were not seen as attractive by foreign exchanges for investment into the Indian stock exchanges. If this step encourages enhanced investment from foreign exchanges, the Indian stock exchanges would stand to benefit from access to technology, management expertise and best practices of foreign exchanges. This will mean better functioning of the Indian stock exchanges and ultimately benefit the investors and Indian public. The liberalisation has come at a time when two of the prominent Indian stock exchanges, Bombay Stock Exchange and National Stock Exchange are planning to list their shares in India through an initial public offering (IPO). Hence the liberalisation also comes as a shot in the arms to the listing plans of these exchanges. Not only would this improve the prospect for their IPOs but also ensure better liquidity for their shares in the future after listing.
It must be noted that the changes discussed above have only been approved by the Government and are yet to be incorporated in relevant Sectoral Regulations, FDI Policy and FEMA Regulations. In other words, as a technical matter, they don't have legal effect as yet. However, from past experience, unless the Government itself revokes or amends these changes they are likely to be adopted in the form approved.
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