With a view to creating further depth in the Indian capital markets and attracting greater foreign investment, the Government has provided another avenue for foreign investors to participate in the stock markets. Until now, the portfolio investment route (i.e. buying and selling on the stock exchange) was available only to two types of foreign investors, i.e. foreign institutional investors (FIIs) registered with SEBI and non-resident Indians (NRIs). However, last year, qualified foreign investors (QFIs) were allowed to invest directly in Indian mutual fund schemes.
Now, the Government has announced (through a press release dated January 1, 2012) that QFIs will be permitted to invest directly in the Indian capital markets. The rationale for this decision has been set out as follows:
Foreign Capital inflows to India have significantly grown in importance over the years. These flows have been influenced by strong domestic fundamentals and buoyant yields reflecting robust corporate sector performance.
In the present arrangement relating to foreign portfolio investments, only FIIs/sub-accounts and NRIs are allowed to directly invest in Indian equity market. In this arrangement, a large number of Qualified Foreign Investors (QFIs), in particular, a large set of diversified individual foreign nationals who are desirous of investing in Indian equity market do not have direct access to Indian equity market. In the absence of availability of direct route, many QFIs find difficulties in investing in Indian equity market.
As a first step in this direction, QFIs have been permitted direct access to Indian Mutual Funds schemes pursuant to the Budget announcement 2011-12. As a next logical step, it has now been decided to allow QFIs to directly invest in Indian equity market in order to widen the class of investors, attract more foreign funds, and reduce market volatility and to deepen the Indian capital market.
Certain checks and balances have been introduced as well. For example, QFIs include only individuals, groups or associations that are resident in a foreign country which complies with requirements of the Financial Action Task Force (FATF) and is a signatory to IOSCO’s multilateral MoU. The QFIs can invest through SEBI registered qualified depository participants (DPs) who must ensure that applicable KYC requirements are met. There are also quantitative investment limits for QFIs, being 5% (individual) and 10% (aggregate) in the paid up share capital of an Indian company.
The Government’s press release appears to be an expression of regulatory intention. The details are to be contained in circulars expected to be issued by SEBI and RBI by January 15, 2012.
This is likely to attract greater foreign investment into the markets as it provides an additional avenue for investors. The current regime for FIIs requires registration with SEBI and compliance with all the requirements under the SEBI FII Regulations, which is often considered onerous. The new proposal appears to rely more on self-regulation through DPs. It remains to be seen whether there would be a gradual migration of FII investment into the QFI route if the latter confers possibilities for regulatory arbitrage. This will become clear only when the operational circulars are issued by SEBI and RBI, and the detailed requirements are known.
This analysis over at VC Circle contains a further discussion of the implications of this move.
I do not understand how direct participation of QFIs in the stock markets will contribute to market stability on the other hand would it not result in volatility of the markets as the same would leave the markets exposed to the risk of capital flight.
what is the risk of capital flight..??