Reason for the downmove -- Maybe
In a move that could make foreign institutional investors (FIIs) rethink their investing plans in India, the finance ministry has suggested a lock-in for such investments.
The Ministry babus may be biting more than they can chew in their effort to keep a clear-cut distinction between foreign direct investments from institutional money through FIIs.
It now wants a minimum lock-in for such money flow.
The letter written to the committee of secretaries headed by the cabinet secretary says, “Keeping in view the volatility of capital flows associated with large withdrawals by FIIs, a minimum lock-in period for FIIs could be prescribed."
While one extreme view may support a lock-in, this could definitely end up being a huge sentiment dampener.
In 2008 FIIs pulled out $13 billion, taking the stock market down by half. Even as that can be blamed on global conditions, market players say that any form of a lock-in for stock market investments is impractical
Abhay Aima, an investment analyst said, “This is a part of the ongoing discussion on guidelines for treatment of foreign investment on the same matter.”
The commerce ministry has recommended uniform investment conditions for both FII and FDI in sectors that have FDI caps and other entry route restrictions.
The finance ministry has opposed this move saying that FII investments should be treated differently and shouldn't be subjected to same norms as FDI. It has even opposed need for FIPB approval for FII investments.
But strangely enough, while it supports the cause of FIIs vehemently, it has also countered its entire stand by proposing a lock-in clause for FII investments.
The proposal to lock-in FII investments will now be taken up by the committee of secretaries, which will chart out the final path for a decison on this, but if the government decides to bring in a lock-in clause it may impact FII investments severely.
