The government on Tuesday widened the ambit of qualified foreign investors (QFIs) and eased several norms to facilitate their greater participation in the Indian market as it struggles to attract fund inflows and curb currency volatility.
With the inclusion of all member nations of the Gulf Cooperation Council and the European Commission, QFIs from 45 countries will be able to invest in Indian equities, debt mutual funds and corporate bonds as against 34 earlier.
The government has also allowed QFIs to invest up to a separate ceiling of $1 billion in corporate bonds and mutual fund debt schemes, said Thomas Mathew, joint secretary in the finance ministry. He added this will be on top of the $20-billion cap for investments in general corporate bonds. ?This is the beginning and we are sort of testing waters,? Mathew said, hinting that if the scheme is a sucsess, the limit may be raised further.
In the Budget for 2011-12, the finance ministry had proposed to widen the class of foreign investors in domestic financial markets. In January 2012, QFIs were allowed to buy Indian stocks directly, but no such institution has yet registered with Sebi as the trading infrastructure is not in place. Sebi has given permission to 27 qualified depository participants to start selling products to QFIs.
With Tuesday?s relaxations, QFIs will also be able to open individual non-interest-bearing rupee bank accounts with authorised dealers? banks for receiving and making payments for transactions in securities they are eligible to invest in, Mathew said. Sebi will soon issue a circular to grant some flexibilities to QFIs in choosing custodians and brokers to route their investments.
Moreover, QFIs are allowed to keep uninvested funds in their individual accounts as long as they want. Currently, funds remitted by QFIs for investment need to be transferred to their overseas bank accounts within five working days of the receipt of funds if the money is not invested as permitted.
?We expect great fund inflows, although they may not be sudden but gradual. We expect the move will curb volatility in fund inflows and help stabilise the market. Plus, more money will flow into the Indian corporate sector as the world will be getting to know the domestic industry better and its visibility will increase on a global scale,? Matthew said.
When QFIs ramp up investments, the product of a company will gain greater appreciation as well, he added. The finance ministry has held a series of discussions with RBI, SEBI and market participants and it decided to relax the rules to facilitate greater fund inflows.
The government will conduct road shows in five gulf countries, the new entrants to the list of nations for QFI investment, between June 10 and June 15 to attract funds to India.
The finance ministry official said net FII inflows have touched $11.89 billion so far this calendar year, up 43% from the total inflows of $8.29 billion for the entire 2011.
?It’s natural that the fund inflows through such measures will help the current account,? Mathew said. India’s current account deficit surged to an unprecedented level of 4% of the gross domestic product in 2011-12 from 2.9% in the previous fiscal, thanks to a whopping trade deficit of $184.9 billion mainly because of crude and bullion imports. The current account comprises the balance of trade, net factor income such as interest and dividends and net transfer payments.
The rupee has also depreciated by around 26% against the dollar since last July, putting further pressure on policy makers to act.
The rupee depreciated on Tuesday, snapping a three-day winning streak, as demand for the dollar from oil firms weighed. The rupee closed at 55.67/68 per dollar, 0.9% down from Monday.
Accordingly, Sebi and RBI issued circulars allowing QFIs who meet the know-your-client norms to park funds in mutual fund debt and equity schemes. However, QFIs should neither be residents in India nor should they be registered with Sebi as foreign institutional investors, sub-accounts or foreign venture capital investors.