Government permits fungibility in FDI, FPI

By extending fungibility of foreign direct investments (FDI) and foreign portfolio investments (FPI), the government has addressed the long pending issue of banks that has been left out so long, along with defence and exchanges.

Saturday's announcements were largely beneficial to the banking sector, where foreign direct investments were just not viable.

“FDI was useless in banking sector, which has too many regulations, like for example, any investor with over 5% required Reserve Bank of India approval. It was more suited for lesser regulated corporate JVs,” said a senior banker at a private-owned listed bank.
Bank Nifty closed 3.76%, or gained a whopping 723.23 points from its previous close at 19,945. Banks stocks, such as Axis Bank and YES Bank, were in the limelight as both the banks were near the upper FII limit 49% cap. Axis Bank shares on Saturday ended 8.98% up at Rs618.10, while YES Bank closed 5.58% higher at Rs820.80.

“The liberalisation of foreign investments, including fungibility between FII and FDI and other sources for all sectors, including banking, will enable companies to raise additional equity capital from multiple sources and will immensely help in boosting the 'Invest in India' agenda,” said Jaideep Iyer, group president (financial management) at YES Bank.
FDI was never a preferred route over FPI or foreign institutional investors (FIIs), even though the upper ceiling was 74% in the former and 49% in the latter.

FDI has always been considered superior to FPI by the previous governments for the reason that they created assets, brought in know-how and helped exports, unlike FIIs that were seen as fly-by-night operators, moving from one market to another almost overnight.
FIIs investments were hence considered hot money, while FDI investments were seen as serious investors willing to stay invested for a longer time.

The school of thought went well with India when it had outdated know-how in several sectors. It was given more weightage when the country initiated economic reforms way back in the 80s through the opening up of automobile sector, and later in the 90s in other sectors with big push reforms.
A decade down the line, with reforms well entrenched, the requirement of India Inc was that of capital and not anymore on know-how. There has been repeated representations made by several bodies in the past.

“The move is a step in the right direction. The notion that FDI was superior to FPI has been debunked by competent Indian entrepreneurs quite sometime back,” said UR Bhat, managing director at Dalton Capital (India) Advisors, an FII.
FIIs investments have a cap of 49% and for banks like YES and Axis, which were inching towards the ceiling, have almost come under the 'orange' list of the Reserve Bank of India, which meant near 47% and on edge, monitoring the limit. While for FDI, the limit is 74%, many corporates do not want to participate if requirement was only capital. With the fungibility of these two institutional investors, companies are a happier lot, especially YES Bank and Axis Bank.