Rules governing foreign investment into the country have been given ample attention by the Foreign Minister. The much dreaded General Anti Avoidance Rule (GAAR) has been postponed by two years, the distinction between foreign portfolio investment and foreign direct investment has been dispensed with, and permanent establishment norms have been put on hold. The only proposal that is of concern is the one that says that capital flows into equity will now be under the government’s purview.

The background

Foreign investors have been pouring money into India, both in equity as well as debt. They have brought in close to $3.9 billion into equity and $5.4 billion into debt so far in 2015. Postponing the implementation of GAAR by two years to the assessment year 2018-19, will keep FPIs happy. The crash in the market following the announcement of introduction of GAAR in 2012 is an ample proof of the importance FPIs on this. Since some of the money coming into India is purported to be black money, these investors have much to fear from GAAR. Making the provisions prospective from April 2017 also gives such investors much relief.

The merger of the FPI and FDI limit is also a positive especially for companies that have hit the upper limit of FPI holding. While flows from overseas are welcome, both the RBI governor and the Finance Secretary have expressed concern about the rupee strengthening due to excessive inflows from overseas. Our export competitiveness was being eroded by the strength in the currency. The move to contemplate capital controls on equity flows appears influenced by this factor.

The Verdict

While the move to postpone GAAR and merging the FPI and FDI limits will have a positive impact, the announcement on capital controls does not sound too comforting and can usher in volatility in the days ahead.

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