Starting off the New Year on a liberalisation note, the government today announced its decision to allow Qualified Foreign Investors (QFIs) to directly invest in the Indian equity market.
The move comes against the backdrop of significant foreign capital outflows from the domestic equity market in recent times, which has resulted in rupee volatility.
"In a major policy decision, the central government has decided to allow Qualified Foreign Investors (QFIs) to directly invest in the Indian equity market in order to widen the class of investors, attract more foreign funds and reduce market volatility and deepen the Indian capital market," an official statement said today.
A QFI is an individual, group or association resident in a foreign country that is compliant with Financial Action Task Force (FATF) standards. QFIs do not include FIIs/sub accounts.
In August last year, the government allowed foreign investors to directly invest up to $13 billion in equity and debt schemes of mutual funds.
With regard to foreign portfolio investments, at present, only FIIs/sub-accounts and NRIs are allowed to directly invest in the Indian equity market.
Amid severe volatility in the capital market last year, Foreign Institutional Investor (FIIs) outflows amounted to more than Rs 2,700 crore. The situation had an impact on the rupee, which fell to an all-time low of to Rs 54.30 on December 15 and fluctuation in the domestic currency has put pressure on policymakers.
Market regulator Sebi and the Reserve Bank of India (RBI) are expected to issue relevant circulars to operationalise the scheme allowing QFIs to directly invest in Indian equities by January 15.
The RBI would grant general permission to QFIs for investment under the Portfolio Investment Scheme (PIS) route, similar to FIIs.
"The individual and aggregate investment limit for QFIs shall be 5% and 10%, respectively, of the paid-up capital of an Indian company," the statement said.
These limits shall be over-and-above the FII and NRI investment ceilings prescribed under the PIS route for foreign investment in India, it added.
"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," the statement said.
As a result, a large number of QFIs, especially a large set of diversified individual foreign nationals who are desirous of investing, do not have direct access to the Indian equity market, the statement said.
"In the absence of availability of a direct route, many QFIs find difficulties in investing in the Indian equity market," it noted.
Furthermore, QFIs would be allowed to invest through Sebi-registered Qualified Depository Participants (DP). A QFI shall open only one demat account and a trading account with any of the qualified DPs and will carry out purchases and sales of equities through that DP only.
The DP should ensure that QFIs are compliant with all KYC and regulatory norms. It would also be responsible for deduction of applicable tax at source out of the redemption proceeds before making redemption payments to QFIs.
"QFIs shall remit money through normal banking channels in any permitted currency (freely convertible) directly to the single rupee pool bank account of the DP maintained with a designated AD Category-I bank," the statement said.