In the FY 2014 Budget speech, the Union Finance Minister P. Chidambarm has sought to remove the ambiguity over what constitutes foreign direct investment (FDI) and what is foreign institutional investment (FII).

According to experts, FII, which is already capped by a ceiling of 10 per cent in a company, there is no change in the Budget announcement. “As far as FDI is concerned, these investments are generally in excess of 10 per cent of the paid-up equity of a company and hence would also not be affected by the Budget announcement,” said U.R. Bhat, MD of Dalton Capital Advisors.

In cases where a new FDI of less than 10 per cent in the equity capital of a company is envisaged, now, the entity proposing the investment can register itself as an FII and make the investment instead of going through the prior approval or post facto reporting that was required of it hitherto, he explained.

Since some of these entities may not be covered by the existing FII definition, SEBI may need to provide appropriate clarifications in this regard, Bhat felt.

The Finance Minister said: “I propose to follow the international practice and lay down a broad principle that, where an investor has a stake of 10 per cent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 per cent, it will be treated as FDI.”Chidambaram in his speech said that a committee would be constituted to examine the application of the principle and to work out the details expeditiously.

“Elimination of ambiguity in classification between FII and FDI could ensure greater FII registration and enhanced flows over the medium term,” said Subrata Ray Senior Vice-President, co-head corporate sector ratings, ICRA Ltd

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