Rupee’s convertibility comes with a caveat

India inched its way closer towards full convertibility of the rupee early last month when finance minister Jaswant Singh unshackled foreign investment by Indian companies, mutual funds and investors. However, the fine print shows that the old control mindset of the Indian authorities has not changed.

For the first time, Indian investors, mutual funds and companies can invest in shares of foreign-listed companies, but there is a caveat. Foreign companies will qualify for Indian investment if they own at least 10% equity in an Indian-listed company. Only around 300 multinationals qualify since they have Indian subsidiaries. Dipesh Pande, a fund manager at Templeton Asset Management, which manages around $2 billion in India, says it is hard to maximize returns to investors on a limited basket of investment.

For Indian companies, investment in foreign-listed shares is capped at 25% of their net worth. They now have greater flexibility in deploying their foreign equity (ADRs and GDRs) and foreign currency loans. They can keep and invest it abroad for longer.