India considers expanded measures to boost strategic foreign investment from 5-year lows

New Delhi: The central government is considering expanded measures to allow greater flexibility for strategic foreign investors to buy stakes in local companies after offshore investment slumped to a five-year low, three sources with knowledge of the matter said.

Policymakers are looking at the option of foreign investments through a mix of equity and debt, which aren't permitted currently, the sources said, noting that a final decision is still pending.

Opening the door to such offshore investments would mark a further liberalisation of the nation's capital market and foreign capital flows, which are subject to numerous restrictions as the Indian currency is not fully convertible.

The plan to allow use of instruments that are a mix of equity and debt, often termed as "mezzanine instruments" in market parlance, are part of a government plan to shore up foreign direct investment into India, the sources said, declining to be identified as they are not allowed to speak to the media.

Government discussions around the proposal have not been previously reported.

Currently, India's foreign exchange laws do not recognise mezzanine instruments in corporate financing, which are common globally, particularly in large transactions involving mergers and acquisition.

Authorities see FDIs as a more stable source of capital though they have remained weak in recent years despite a fast growing economy.

Gross FDI, which includes reinvested earnings and equity inflows, fell to $71 billion in 2023-24, the lowest since 2018-19, from $71.4 billion in 2022-23 and $84.8 billion in 2021-22, according to data from the Reserve Bank of India.

The proposal to further expand foreign investment options could lead to an additional $20-30 billion in overseas inflows into the South Asian economy, according to internal estimates, said one of the three sources. The government estimates didn't provide a timeline for the potential investment boost, the source said.

The proposal is currently in discussion stage with the federal finance ministry which is in favour of the change, said one of the sources.

The finance ministry did not immediately respond to an email seeking comment.

India attracted 2.1 per cent of global FDI in 2023 after peaking at 6.5 per cent in 2020, according to ratings agency India Ratings and Research.

Finance Minister Nirmala Sitharaman last week said India needs $100 billion FDI each year to meet its investment needs, up from $70-$80 billion at present.

Companies are currently allowed to raise equity or securities that are compulsorily convertible to equity under the FDI rules, where caps are imposed on foreign investment for some sectors such as banking and defence.

They can also raise debt from foreign sources under a separate set of rules which limit the cost and use of loans and bonds raised.

Allowing investments through mezzanine instruments provides greater flexibility for foreign investors, said Teena Goyal, an investment banker at En Pointe Adwisers.

It also allows for an easier exit since investors find it tougher to access buyers for large chunks of equity unlike for debt, Goyal said.

However, these investments could also stoke currency volatility and put pressure on the rupee, she said.