What do foreign investors want?

The behaviour of the foreign institutional investors is gauged from the numbers put out by the exchanges and regulators

It is a common practice in media to gauge the behaviour of the foreign institutional investors (FIIs) from the numbers put out by the exchanges and regulators. The data typically includes numbers of total purchases by FIIs on a given day, total sales and an aggregate number netting off the sales and purchases.

Based on this number, it is concluded that the FII mood was positive or negative as the case may be. The mathematical possibility of a single large transaction skewing the numbers is almost always overlooked, since the number of buyers or sellers on a given day are not available.

Despite media and regulatory mechanisms to bunch these players under the FII umbrella, they remain a heterogeneous group with diverse interests. It is not very often one see them talking in unison and through a forum.

Last year, Indian government put forward its proposal on General Anti-Avoidance Rules (GAAR). The move, seen as a common threat, united the foreign entities like never before and Asia Securities Industry and Financial Markets Association (Asifma) emerged as the voice of foreign investors and represented them in discussions with government.

Though it is not recognised as an official FII mouthpiece, it is better than the other barometers of FII sentiment we have. Asifma recently published a white paper titled 'Asia's capital markets: strategies for sustained growth.'

The Asifma paper points to various systemic inefficiencies in the Asian markets, which act as irritants to foreign investors. Many of these irritants are prevalent in Indian markets too. An extract of some suggestions:

Remote membership
Asifma wants Asian securities market regulators to collaborate to allow substitute regulatory approval; that is where the brokers' approval and regulation under another regional regulator will be taken into account as part of their assessment for remote trading membership.

Most Asian markets require brokers to be physically domiciled on shore. This is achieved by either prohibiting brokers' systems from being located offshore, prohibiting certain support functions from being performed offshore, or by mandating minimum level of staffing and particular roles to be retained onshore.

As a result, the body says many international brokers avoid becoming members of these Asian markets, instead routing their trades to one or more locally incorporated brokers. This practice exposes them to several risks, it says. But it is not clear if Indian authorities and local brokers would favour such a move.

Ownership limits
While the desire to retain national control over certain companies and industries is understood, current mechanisms and models employed to limit foreign ownership are due for review as they inhibit quality inflow of investment, both international and intraregional.

Ownership identifiers
Registration at the individual fund level creates delays and added costs. Removing these, or permitting regional and global investors to register at a parent/manager level, would enhance market efficiency and promote greater regional and international investment.

Gross settlement
Settlement at the individual fund level creates additional credit exposure, cost and time lag, leading to inefficiencies in post trade processing. These obstacles can be removed by eliminating ownership registration, permitting parent level registration or a nominee structure at broker level for settlement, and mitigating investors' market and credit risk by supporting DVP (Delivery Versus Payment) settlement.

The paper also talks about market specific measures to address issues in fixed income, derivatives and bond markets. Our regulators and policymakers should go through these to get a better idea of what the FIIs want.