The government has allowed foreign institutional investors (FIIs) to invest up to 23 per

cent in commodity exchanges through the automatic route. This came into effect on April 10.As per the fifth edition of the consolidated FDI policy document released by the department of industrial policy and promotion (DIPP) on Tuesday, FII investment in commodity exchanges will no longer require government approval.

“ This change aligns the policy for foreign investment in commodity exchanges with those for other infrastructure companies in the securities markets, such as stock exchanges, depositories and clearing corporations. However, FDI in commodity exchanges will continue to require government approval,” the circular said.At present, the FDI investment cap in commodity excha­ nges is fixed at 49 per cent, which requires prior approval from the Foreign Investment Promotion Board (FIPB). Within this overall limit, investment by registered FIIs under the portfolio investment scheme is limited to 23 per cent while investment under the FDI scheme is limited to 26 per cent.

Industry experts said the government decision would provide a major fillip to the growth of commodity exchanges in the country. Market analysts said the move was in line with several government initiatives over the past few months to encourage dollar inflow in a bid to narrow down current account deficit.

India’ s current account deficit stood at 4.6 per cent of GDP in the December quarter, much higher than the manageable level of 3 per cent.

“ The decision to allow FIIs to invest in commodity exchanges through the automatic route will bring in higher volumes to the commodity market in India by enhancing the overall liquidity. It will add width and depth to the commodity market,” said Venkat Chary, chairman of Multi Commodity Exchange. Shares of MCX closed flat at Rs 1,257.25, down 0.54 per cent. “ We are running a huge current account deficit. Today’ s decision will encourage dollar inflow into the country through greater foreign participation in the commodity exchanges. Various policy measures in the past have been aimed at increasing dollar inflow into the country without jeopardising the domestic economy,” said DK Joshi, chief economist at Crisil. The FDI policy also discourages import of sub-standard second-hand equipment and machinery. To achieve this, the government has withdrawn the facility of offering equity against such imports.

While relaxing FDI rules in March last year, the government had allowed issuance of equity to overseas firms against imported capital goods and machinery, including second-hand machinery. The policy clarified that subject to sector-specific foreign holding cap companies would need prior permission from the Reserve Bank of India to raise overall FII holding beyond 24 per cent. It also clarified that the activity of leasing and finance, which was one among the 18 activities of non-banking finance companies where induction of FDI is permitted, covers only financial leases and not operating leases.

Owing to substantial rationalisation/liberalisation achieved in the FDI policy so far, DIPP has decided to bring about consolidated FDI circulars once a year against the present practice of twice a year. The next policy will be announced on March 29, 2013.

Source: Financial Chronicle