All foreign equity investments in stock exchanges prior to their listings will be treated as foreign direct investment, where 26 per cent is expected to be the cap.
The much-awaited guidelines on foreign stakes in bourses would, therefore, allow foreign institutional investors to buy only after their listings, said a source close to a development clearly distinguishing between FDI and FII investments in stock exchanges.
Simply put, although the combined foreign stake in bourses may be 49 per cent, it will practically remain 26 per cent, as the proposed 25 per cent cap on FIIs in bourses will come into play only after their listings on the exchanges.
"Only secondary market purchases by foreign players will come under the FII cap," said the source, adding "even the buying of stakes through public issues will be considered FDI".
Another feature of the proposed guidelines will be the non-fungibility of the FDI and FII stakes. Sources said the proposed guidelines were expected to make the FDI and FII equity stakes non-fungible. This means, the FDI and FII stakes in stock exchanges will not be inter-changeable.
The sources also clarified that the 5 per cent individual limit set by the Securities and Exchange Board of India would be applicable to both the categories - foreign and domestic.
It is also learnt that FIIs will be barred from the membership on the boards of exchanges, as per the policy. However, it is not known if FDI investors will be allowed to be on the boards.
When contacted, an official of an overseas stock exchange, which was keen on picking up a strategic stake in the Bombay Stock Exchange, said the restrictions put on foreign equity in Indian stock exchanges would severely hamper the integration of domestic financial markets with overseas markets.
"A strategic holding in a domestic stock exchange does not mean interference in the day-to-day activities of Indian stock exchanges," the official said.
Names of global exchanges such as NYSE, Nasdaq and Australian stock exchange and FIIs such as Goldman Sachs, Nomura and Fidelity; and private equity investor Temasek, among others, have been doing the rounds ever since the BSE announced plans to sell 26 per cent stake to strategic investors early this year.
The Road ahead
The proposed guidelines were expected to make the FDI and FII equity stakes non-fungible. This means, the FDI and FII stakes in stock exchanges will not be inter-changeable.
Sources said that the 5 per cent individual limit set by the Securities and Exchange Board of India would be applicable to both the categories - foreign and domestic.