RBI Proposes Doubling Foreign Individual Investment Limit to Boost Capital Inflows

New Measures to Counter FPI Outflows

The Reserve Bank of India (RBI) plans to raise the investment limit for individual foreign investors in listed companies to 10% from 5%. This move aims to enhance capital inflows, as per senior government officials and documents seen by Reuters.

• Foreign portfolio investors (FPIs) have withdrawn over $28 billion from Indian equities since the NSE Nifty 50 reached its peak in September.
• India intends to extend privileges previously exclusive to overseas Indians to all foreign investors, while increasing investment thresholds.
• RBI communicated to the government via a letter last week, stating “It is felt that these proposals may be implemented as early as possible,” citing concerns about disrupted capital flows in recent external sector developments.

New Framework for Foreign Individual Investors

According to the document, the new framework would permit all foreign individual investors to hold up to 10% in a listed company. This is an increase from the current 5% limit allowed to overseas Indian citizens under the Foreign Exchange Management Act (FEMA) special provisions.

• “The existing foreign exchange regulations specifically address non-resident Indians (NRIs) and overseas citizens of India (OCIs) under Schedule III,” explained the second government official, who requested anonymity.
• “The scope is being expanded to encompass all individual foreign investors.”

Increased Aggregate Investment Ceiling

RBI plans to increase the aggregate investment ceiling for all overseas individual investors in an Indian listed company to 24%, up from the current 10%, according to the officials.

• Discussions regarding the increase in foreign investor limits for Indian listed companies are nearing completion, with final deliberations ongoing between the government, the RBI, and SEBI.
• SEBI has expressed concern that when a foreign investor’s 10% stake is considered alongside associates’ holdings, the total could surpass 34%, necessitating takeover regulations.
• “Without effective monitoring across different frameworks, such takeovers may go undetected,” SEBI cautioned the RBI in a letter last month.

Regulatory Challenges and Solutions

According to Indian regulations, any investor acquiring beyond 25% ownership must extend an open offer to retail shareholders. The authorities and regulatory bodies are currently evaluating these issues prior to implementing the reforms.

“We are working to rationalise the rules to prevent the possibility of such arbitrage across regulations by the foreign investors,” the second official said.