The government is reportedly mulling to amend the Foreign Exchange Management Act (FEMA) to remove theoretical distinction between foreign direct investment (FDI) and foreign institutional investor (FII). This policy change is likely to affect asset reconstruction, direct-to-home broadcasting distribution, and real estate companies where there are Sectoral caps on foreign investments.
While Ministry of Finance (MoF) is in conversation with the Reserve Bank of India (RBI) and the Department of Industrial Policy and Promotion (DIPP), officials argue that the move has been necessitated because it is getting harder to distinguish the two forms. They say that in some cases subsidiary companies’ investments may be treated as FII while the parent company’s investment in operations is treated as FDI and that many developed markets are dropping this distinction.
The government had so far used the distinction to limit investment in some sectors it considers sensitive such as real estate and broadcasting. It is not clear if this change has been inspired by true dilution of investment limitation policies or because they have noticed an abuse of investment through the backdoor in these sectors.