The Reserve Bank of India has proposed a range of measures including sectoral ceilings and lock-in for investments by foreign private equity funds.
The central bank is concerned at the large foreign exchange inflows through the PE route.
Among its suggestions to the finance ministry, RBI has also said the government should classify private equity under a separate category of foreign investment, or create sub-limits within foreign direct investment or investments by foreign institutional investors. Foreign private equity is currently counted under FDI.
The government is currently reviewing FDI and FII norms.
RBI has suggested that foreign private equity investments should be considered within the foreign investment ceilings for various sectors and separate caps could be stipulated for private equity investments in different sectors.
RBI wants a lock-in so that PE funds remain invested for a longer period till the time the target is successfully restructured.
The suggestions by RBI have stemmed from an internal study that showed private equity investments have, in many cases, not led to new job creation. In many recent management buyouts, banking sources said, excess employees were laid off.
According to the central bank, FDI should ideally result in infusion of fresh equity or creation of jobs and add to the productivity of the sector.
Stockmarket regulator Securities and Exchange Board of India (Sebi) and RBI had formed study groups about six months ago to analyse the structure and impact of such funds on investors, the companies in which they invest and their effect on corporate governance.
Following these buyouts, PE firms become virtual conglomerates and have a larger say in management decisions, thus raising issues of corporate governance, said sources close to the developments.