Despite recent sell-off, significant rise in foreign investor count

Sebi's new FPI regulation has helped attract new capital pool, up registrations

Foreign investors' interest in Indian markets shows no signs of waning, even as some of them have pressed the sell button in recent times. Since the introduction of the new foreign portfolio investment regulations by the Securities and Exchange Board of India (Sebi) in June last year, there has been a significant rise in the number of foreign investors.

Sebi had overhauled the regulations for the entry and participation of foreign investors by introducing the FPI Regulations, 2014. Between then and July this year, the regulator has registered over 1,000 new FPIs (about 925 a year). This is a considerable increase over about 750 new foreign institutional investors (FIIs) and sub-accounts that Sebi earlier used to get on average in a calendar year.

"There has been a healthy uptick in the numbers since the new regime went live in June 2014. With the FPI regime, the regulators have succeeded in one of their aims of attracting a new pool of capital into the country," says Aashish Mishra, head of securities services, Citi India.

The FPI regulations, aimed at bringing new investors, have eased the entry of investors by merging various categories like FIIs and sub-accounts into one. It has also introduced a new risk-based know-your-customer (KYC) system.

Market players say certain kinds of entities that were not allowed to register under the old regime have now become eligible.

A fourth of new registrations are those of such types of investors.

"We have seen a significant increase in new account openings this year. The pipeline of registrations which we are currently working on is strong, too, indicating a broad interest in our market," says Kapil Seth, MD & head, HSBC Securities India.

Though the Indian market has seen a sharp sell-off by foreign investors in recent months, there was a whopping 65 per cent rally - almost linear - between August 2013 and March 2015. Also, during this period, FPIs poured in a staggering $30 billion into Indian stocks.

"The introduction of a new FPI regime could not have come at a better time; it has coincided with the investor interest in India as a preferred emerging-market investment destination. This has given a boost to the new accounts by foreign investors," says Anand Rengarajan, MD & head of investor services, Deutsche Bank India.

More importantly, the new regulations have brought newer geographies' exposure to Indian markets.

"The US and Mauritius have traditionally been strong geographies in terms of FPI registrations. But we are seeing material pick-up in new registrations from jurisdictions like Luxembourg, Canada, Ireland and Singapore," adds Seth.

Another reason for the uptick in registrations has been an increased interest in the country's debt market.

Citi India's Mishra says there has been an increase in enquiries for India exposure - for both fixed income and equity from long-term investors like pension and sovereign wealth funds.

The increase in the number of fixed-income investors has been one of the key reasons for the boost in new registrations, says Seth.

Experts say the recent risk-off trade and the retrospective taxation controversy have not made a big dent in so far as registration of new investors is concerned.

"Investments might vary on the basis of larger global considerations. But the idea of registering and being ready to trade, as and when the appetite looks better, is quite strong," says Seth.

Industry players say they are working with the regulators to iron out some issues in FPI regulations. "There is a momentum for further fine-tuning of the new model. The industry and Sebi are looking into various aspects to enhance ease of business for FPIs," says Rengarajan.

Further improvement in the FPI regime and an increase in the pace of reforms could further bolster FPIs' entry into the country, experts add.