Union Finance Minister, Shri Pranab Mukherjee today announced in his Budget Speech that discussions are underway to further liberalize the Foreign Direct Investment (FDI) policy. All prior regulations and guidelines have earlier been consolidated into one comprehensive document in order to make FDI policy more user friendly. This is reviewed every six months, said the Finance Minister. The last review was released in September 2010.

The Security and Exchange Board of India (SEBI) registered mutual funds would be permitted to accept subscriptions from foreign investors to meet the KYC requirements for equity schemes. This would liberalize the portfolio investment route and would enable Indian mutual funds to have direct access to foreign investors. The new policy would widen the class of foreign investors in Indian equity market, which had hitherto been restricted to only Foreign Institutional Investors (FIIs), sub-accounts registered with SEBI and NRIs.

The Union Budget 2011-12 also proposes to raise the FII limit for investment in corporate bonds to enhance the flow of funds to the infrastructure sector. Shri Mukherjee said that the limit for investment in corporate bonds, with residual maturity of over five years issued by companies in infrastructure sector is being raised by US $20 billion which would now be US $25 billion. This would raise the total limit available to FIIs for investment in corporate bonds to US $40 billion. Since most of the infrastructure companies are organized in the form of Special Purpose Vehicles (SPVs), FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years. However, the FIIs would be allowed to trade amongst themselves during the lock-in period.

Foreign investment liberalization expands investor classes and raises FII corporate bond limits, permitting FII investment in unlisted infrastructure bonds. SEBI-registered mutual funds may accept subscriptions from foreign investors for KYC in equity schemes, widening permissible foreign investor classes and facilitating direct foreign participation via the portfolio investment route. The FII corporate bond investment ceiling for infrastructure issuers with over five years residual maturity is increased and FIIs may invest in unlisted bonds of infrastructure SPVs subject to a minimum three-year lock-in while being allowed to trade among themselves during the lock-in period.