The Reserve Bank and SEBI issued separate notifications in this regard which said 49 per cent foreign investment would be allowed in infrastructure companies in the securities market like stock exchanges, depositories and clearing corporations.
Within overall foreign investment cap of 49 per cent, FDI would be permitted up to 26 per cent and FII up to 23 per cent. However, no foreign investor will be allowed to hold more than five per cent of the equity in the stock exchanges.
The notifications said that necessary amendments would be carried out in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.
Clearance from the Foreign Investment Promotion Board will be mandatory for foreign direct investment in these companies.
While foreign institutional investments will be allowed only through purchases in the secondary market, they will not be allowed to hold representation on the board of directors of such companies.
The move is widely expected to benefit demutualisation of stock exchanges beginning with the Bombay Stock Exchange. The BSE had been waiting for these guidelines as it has to demutualise by May next year.
There were reports that Nasdaq and NYSE, among other overseas bourses and funds, were interested in picking stake in BSE.
In August, Nasdaq officials met their counterparts in BSE, giving rise to speculation that the tech exchange would pick up a stake in it.
BSE has appointed Kotak Mahindra Capital Company as its financial advisor for the demutualisation process, which refers to bringing down brokers stake below 51 per cent.
The move to allow foreign investment in stock exchanges was delayed as the government had to take a decision on whether it had to be through a Cabinet clearance or by an executive order amending the Foreign Exchange Management Regulations.
With today's move, the London Stock Exchange and New York Stock Exchange will be able to pick up stakes in Indian bourses like the BSE and regional exchanges.
According to the recent guidelines, barring the National Stock Exchange, all other stock-exchanges could be demutualised but it was mandatory that Indian public holding would have to be at 51 per cent.
Some of the foreign stock exchanges have already evinced interest in picking up a stake in the BSE. The move will also help in the revival of some of the regional stock exchanges.
BSE chief, Rajnikant Patel, had said recently that the stock exchange has already initiated steps to demutualise and was discussing with strategic partners to off-load some stake.
The BSE was looking at how to leverage and synergise the special expertise and domain knowledge of the partner and how it would help in making the Indian capital market more global, he said.
More from rediff