Govt looks at ways to woo foreign investors

Mulls easing of norms for FII, individual investment in the stock market.

The government and financial sector authorities are discussing ways to ease norms governing investments by overseas investors – both individual and institutional – in Indian stock markets.

MEASURES ON THE ANVIL

Strengthen onshore market and enlarge position limits on derivatives market

Re-examine the rationale of levies such as STT, stamp duty

Ensure full range of currency and equity derivatives are traded on exchanges

Ease eligibility rules for FIIs and sub-accounts

Reduce one-time transaction costs for FIIs and sub-accounts

Bring in the Qualified Foreign Investor framework

Depository participants to open accounts for customers from all over the world

NSE, BSE broking firms should have global presence to book foreign orders

The intention is to simplify the existing regulatory regime for foreign investors in corporate securities.

Three alternative approaches under consideration envisage addressing flaws of the domestic market, broadening the foreign institutional investor (FII) framework and replacing the FII regime with a Qualified Foreign Investor (QFI) framework.

The discussion centres around enhancing the role of FIIs and their sub-accounts in the Indian capital market. By reducing the complexity of obtaining permits, foreign investors would be encouraged to utilise onshore Indian stock market platforms.

For individual investors, the attempt is to allow them to trade on Indian bourses by opening a demat account with Indian depositories and a bank account dedicated to securities transaction in India.

In effect, this implies that a foreign investor can trade on Indian bourses while stationed anywhere in the world. It is envisaged that such trades would be done through overseas terminals of Indian brokers, call centres, internet or even through mobile banking.

Since the fund flow (inbound and outbound) would happen through a dedicated bank account, the Reserve Bank of India (RBI) would be able to verify the transactions and their veracity.

In addition, it is likely that the eligibility rules for FIIs and sub-accounts may be broadened to attract more institutional investors to India.

Since September 2007, more than 350 new FIIs have registered with the Securities and Exchange Board of India (Sebi), thanks to the regulator’s move to ease the registration process last October. However, since January this year, FIIs have pulled out nearly $9.5 billion from the Indian stock market as against a net investment of over $17 billion in 2007.

The proposed QFI framework would serve to enhance know-your-customer (KYC) norms and the ability to trace all transactions when investigations are carried out. In addition, the opacity of the over-the-counter (OTC) market would be avoided, even as P-note holders would be encouraged to invest directly in the Indian market.

At the same time, by permitting foreign customers to go through the required steps at the offices of depository participants and banks all over the world (instead of visiting Sebi in Mumbai), the QFI framework would perhaps emerge as a credible alternative to onshore OTC equity derivatives.

In effect, the step of ‘account opening’ at Sebi would be replaced by ‘account opening’ at offices of financial firms worldwide.

The QFI framework replicates the de facto situation on capital controls prevalent in India for participation in the securities market.