government is hot on capital inflow as it looks to smoothen the path for foreign investors.
The finance ministry, on suggestions from the Prime Minister’s Office, has set up a high-powered committee with nine members to recommend changes to the existing rules and policies that govern foreign inflows into India, except the FDI route. The finance ministry’s move is in contrast to federal policy changes in Brazil and Taiwan where the governments last week put curbs over foreign money coming into those economies.
The main purpose to form the committee, which is being headed by U K Sinha, chairman, UTI MF, is to suggest changes to the rules and policies that could facilitate more foreign fund inflows into the country, sources said.
The committee has a very wide mandate, including to review policies relating to taxation, obstacles that hinder foreign flows like foreign portfolio investments (popularly FII investments) into the country, the treatment of participatory notes, inflows through the venture capital route, external commercial borrowings, investments in India by NRIs and several other issues. The group will also look at specifying challenges in meeting the financing needs of the economy through foreign investment, and will also examine the rationale behind securities transaction tax and stamp duty. The policies related to FDIs have been kept out of the purview of this committee.
The move comes in the backdrop of apprehensions among a section of the market over surging foreign inflows and talks about controlling these flows, mainly because it is leading to steeper appreciation of the Indian currency and hitting exports.
Contrastingly in this case the government has gone ahead and set up a committee to look into ways of smoothening out inflow of foreign funds into the country. So far in the current financial year, net FIIs inflows are $16.5 billion while the rupee has appreciated 8.6% to the dollar to its current level of 46.39. Recently, in the face of demands for capital controls, C Rangarajan, chairman, PM’s Economic Advisory Council, said given the size and growth prospects of the Indian economy, it can absorb up to $100 billion per annum of foreign capital before any restrictions could be imposed.
Among the issues to be addressed by the committee, P-Notes are a contentious issue in India with RBI opposing its use by FIIs while the finance ministry is unwilling to ban it, fearing huge outflows by foreign investors. P-Notes are a type of offshore derivative instrument that allow foreign investors to enjoy all the benefits of holding Indian stocks without actually owning them and also nearly full anonymity. Likewise there is also a growing demand among market players to abolish STT.
The committee formed by the finance ministry is mandated to submit its report within four months.
