Q&A: U K Sinha, CMD, UTI AMC

'Foreign investors need clarity on the rules'

The U K Sinha committee report, which was released by the government this week, seeks to make life more predictable for foreign investors besides suggesting that steps should be initiated to protect individuals investing overseas. Sinha, who is the chairman and managing director of UTI Asset Management Company, spoke to Sidhartha about the committee’s recommendations. Excerpts:

What is the underlying philosophy behind the report?
The idea was that the country has progressed significantly in the last 15 to 18 years when the FII (foreign institutional investors) regulations came in. Between then and now, a number of developments have taken place and the regulators and the government have responded in various ways. For instance, when the plantation sector problem occurred, non-resident Indian (NRI) investment was banned in the sector. Similarly, after the Ketan Parekh episode, overseas corporate bodies were banned. Sometimes we have encouraged participatory notes, sometimes we have discouraged them. On issues such as derivatives, the government and the regulatory stand is not very clear. We have come to a situation in which the rules for foreign investors have become complex, at times contradictory, and there is a lack of clarity on their interpretation. At the same time, we have the false comfort that our system is taking care of know-your-customer (KYC) requirements.

But there are more players who have come to India in the last few years…
The Indian economy has internationalised in a big way and the report talks about it. For instance, the gross investment position on the current account rose 23 per cent in the 1990s, and by 40 per cent from 2000 to 2008. The gross investment position on the capital account rose 43 per cent between 2000 and 2008 from 12 per cent in the nineties. Indian companies have seen a five-fold increase in the foreign assets that they hold on their balance sheets. So, we need to recognise the global integration and devise policies accordingly.

There are four countries that form a good peer group — Brazil, South Korea, South Africa and Turkey or BSST countries. We looked at the type of the economy, the political system and the legal systems and chose these countries instead of the BRIC grouping. We discovered that our current system has lacunae and it has become very costly for foreign investors. So, there is need to remove legal uncertainty. There should be a single window for foreign investors, which we call qualified financial investors. We should regulate asset classes rather than investment vehicles. If you want to regulate equities, please do so. The guiding principle should not be whether I come as a venture capitalist or as a sub-account holder or as an FII. The role of the regulator should be to ensure the integrity of the market, which should not be compromised. But why should there be different margin requirements for foreigners and for Indians?

So, you are calling for national treatment once an entity is allowed to invest?
Yes. Once somebody has been allowed, you treat him equally. That will give him comfort. We are a strong country today and not where we were in 1991-92. We are part of G20 now.

You have talked about more stringent KYC norms. Will it not discourage investors?
The norms should be strengthened by capturing more information. We should follow the FATF (Financial Action Task Force) and OECD (Organisation of Economic Cooperation and Development) best practices. The G20 and the OECD and BSST countries follow similar norms. So, a genuine investor will not be discouraged. But there should be a legal remedy. At the moment, the system is complex. For instance, if someone wants to register as an FII or as a sub-account holder, there is no prescribed time frame. There is no remedy available to them to find out why their application has not been cleared.

Will this also address the participatory notes (PN) issue?
PNs were being used by three types of people. One, the genuine investors who found the system very expensive. Second was a group of people who did not want to disclose their identity, for whatever reason. And, the third set of people included those who genuinely wanted to issues PNs. What we have recommended will create more favourable conditions for registration. By tightening the KYC norms, we can make life tough for people with malicious intent. There will be a set of people who don’t want to disclose their identity, but the volumes will be very low. This group, which will include pension and endowment funds, will do so for genuine reasons. But even here, Sebi (Securities and Exchange Board of India) will have more powers to seek details, if the recommendations are accepted.

You have talked about reforms in the debt market, which various other committees have also discussed. But we have so far not gone the whole hog to reform it…
Our basic recommendation is that there should be more and more encouragement to the domestic market rather than for foreign borrowings. We should encourage foreigners to come to the domestic bond market. We have a ceiling on investment in bonds by foreigners. Some part of it is auctioned, while some part is given on a first-come-first-serve basis. We need to remove all this as they are remnants of the past. Maybe you cannot do it in one go. So, you can remove it gradually. Also, instead of a number for the ceiling, it should be a percentage of overall foreign inflows.

The report also talks about overseas investment by Indians under the liberalised remittance scheme (LRS). Have there been instances of people being fleeced that prompted you to deal with the issue?
The LRS limit is $2,00,000 and there are a large number of people who would want to invest overseas. But the problem is how do you do it since many of us are not exposed to the available options. Marketing and advertising overseas schemes is not allowed in India. We found that the issue was not about the macro considerations, it was due to the fear of people getting fleeced that it was not permitted. So, we need to put in place safeguards and protect our consumers. For this you can allow entities that are regulated overseas approach Sebi for vetting literature and other marketing material that they plan to offer in India.