The government is considering a proposal, first raised in 2004, to liberalise norms governing foreign institutional investorsby removing them from the ambit of sectoral limits on foreign investment.

The Department of Industrial Policy and Promotion recently proposed a draft note to this effect for the Cabinet Committee of Economic Affairs to consider.

The relaxation will apply to those sectors that have composite caps (foreign direct investment or FDI plus FII).

"The move will not impact sectors like banking and insurance which are governed by Acts of Parliament. However, sectors with composite caps which see administrative control like telecommunication services, broadcast services like direct-to-home and FM radio will benefit," a Delhi based FDI policy expert told Business Standard.  

Accordingly, FII investment under the Portfolio Investment Scheme would be governed by schedule (2) of the Foreign Exchange Management Regulations, 2000, and not be taken into account for the overall FDI cap.

This, however, will be subject to certain conditions. For instance, such FIIs will not be able to seek board or managerial positions in the company in which they invest. Disclosures will also be required whenever they choose to act in concert with the management of the company concerned.

The proposal is intended to improve the availability of funds for Indian companies given that FIIs, traditionally strong investors, have reduced commitments to India on the back of the global financial crisis.

A similar proposal was recommended in 2004 by the Ashok Lahiri committee, which had said, in general, FII investment ceilings be reckoned over and above prescribed FDI sectoral caps.

FDI VS FII FDI means investment by a firm in one economy in a firm located in another economy, to sustain long-term interest through significant influence on the management. Direct investors also have the right to appoint directors on the board FIIs are primarily concerned with their capital, the likelihood of appreciation in value and the return generated. They generally have no significant influence over companies' operations

It is not yet known when the policy changes may be finalised, although a senior commerce and industry ministry official recently told Business Standard that moves were being made in this direction.

Agreeing with the need to separate the two investment channels, Akash Gupt, executive director, PricewaterhouseCoopers, said both FDI and FII have different purposes.

"FDI is for acquiring a stake in firms, but FIIs are concerned about the value of the capital they have invested through the share market. One needs to differentiate FII and FDI through policy actions," he said.