P-note holders will get a cheaper option: Vasudha Sundararaman

Interview with MD & CEO, SBI-SG Global Securities Services

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The custodial arm of State Bank of India, SBI-SG Global Securities Services, manages $20 billion. Vasudha Sundararaman, managing director and chief executive, tells Joydeep Ghosh & Sachin Mampatta the Securities and Exchange Board of India (Sebi)’s recent guidelines allowing foreign portfolio investors (FPI) the same treatment as foreign institutional investors (FIIs) will help P-note participants enter the Indian market directly through custodians and in a cost-efficient way. Excerpts:

How will the market dynamics be affected by the change in foreign investor guidelines?

An important fallout is participatory-note (P-note) holders can invest in India by registering themselves with custodians. Earlier, they had to take the FII route. It will also become much cheaper. Coming through an FII would have meant a cost of two-2.5 per cent of the assets. Now, they have to pay $1,000 for registration and transaction costs.

After the recent FPI regulations with regard to qualified foreign investors (QFIs), is there sufficient clarity on taxation and responsibility of custodians?

For the other categories of foreign investors, it is the custodian responsible for ensuring tax has been deducted before the remittance is made abroad. As of now, custodians are not willing to take that responsibility for qualified foreign investors (QFIs). If it is decided who will be responsible for tax payment, there will be more clarity. However, the nuances will have to be watched as the custodians also have to feel the demand is fair. The matter is being discussed at Sebi. Some clarity is expected on it.

It has been suggested QFIs could be asked to accept the tax responsibilities themselves. From your interactions with FPIs, does this seem viable?

The responsibility for tax payment of FIIs was always on them. But, in the case of QFIs, the qualified depository participant (QDP) was expected to ensure tax deductions and related issues. However, as FPIs are expected to have the same treatment as FIIs, rather than of the QFIs , it is definitely better.

How has the large volatility in flows over the last few years impacted the custodian business?

FII flows have been volatile, so if there is far more outflow than inflow, income for custodians stands reduced.

The income avenues from the domestic business are largely from transaction fees and the custody itself. Incomes, however, are higher for foreign assets. There are other sources of income in the FIIs. You have float funds (capital foreign investors have not remitted abroad nor made an investment with) that can be used to generate additional revenue and revenue from forex conversion.

If you compare Rs 5,000 crore of foreign assets and Rs 50,000 crore of domestic assets, possibly the two would be contributing equally to the custodian’s income.

So, our strategy is to ensure a judicious mix of the two so that when one is not good, the other will sustain us. That is the way we try to grow our portfolio, in a balanced way with FIIs as well as domestic clients.

India has been talking about entering the bond indices. What steps are needed to ensure it?

There will have to be some kind of rupee convertibility so the settlement can take place without any difficulty. There would have to be steady issuances happening so these will have some liquidity.

There is talk of a lot of Chinese investors looking at investment opportunities in India. Are you looking to tap that as a custodian?

Definitely. Our senior management officials have provided some feedback on it. A top official visited China sometime ago. The inputs we received suggested a lot of things are happening there and there could be good amounts of investments taking place.