India simplifies investment rules, banks to benefit

New Delhi, July 16

India has simplified rules for foreign investment in firms by clubbing together different categories, Finance Minister Arun Jaitley said today, effectively giving equal treatment to global capital entering Asia’s third largest economy.

The move, flagged by Jaitley in his budget in February, will make it easier for banks like Yes Bank and Axis Bank to raise capital up to a foreign ownership limit of 74 per cent.

“One of the most important decisions in relation to the investment is the introduction of composite caps for simplification of foreign direct investments,” Jaitley told reporters after a Cabinet meeting.

Jaitley said foreign direct investment, foreign portfolio investment and investments by non-resident Indians would be ‘clubbed together under a composite cap’.

Banking stocks rose after the announcement. Axis Bank shares rose nearly five per cent, while Yes Bank gained 3.6 per cent in a Mumbai market that was up 0.8 per cent.

Previously, foreign capital had been subject to varying restrictions — a legacy of India’s socialist past and its lingering reluctance to allow capital to move freely across its borders.

The Department of Industrial Policy and Promotion, part of Commerce Ministry, proposed simplifying the investment rules after Prime Minister Narendra Modi won an election last year by pledging to boost investment and jobs.

For banks, the shift will lead to an increase in their effective free float — or the number of shares that can be easily traded. That in turn would lead to an increase in their weighting in benchmark indexes tracked by many fund investors.

India has also allowed 100 per cent investment in pharmaceuticals and railway infrastructure under a so-called automatic route that does not require official approvals.