Starting the New Year off on a positive note, the Indian Government has decided to allow "Qualified Foreign Investors" (QFIs) (a group that will include most foreign individuals) to directly invest in India's equity markets. QFIs were previously allowed to access Indian mutual funds and the present move broadens the investment diversification options and available to foreigners.
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are expected to announce rules to implement the government's decision by January 15, 2012. This said, the Indian government's New Year's Day policy announcement suggests that the rules will be similar to those that apply for QFI access to Indian mutual funds.
Accordingly, to qualify as a QFI the foreign investor will need to meet two conditions. First, the investor should be resident in a country that is compliant with the Financial Action Task Force's (FATF) standards and is a signatory to the International Organization of Securities Commission's (IOSCO's) Multilateral Memorandum of Understanding. Second, the investor should meet SEBI's know-your-customer requirements.
The individual and aggregate investment limits for QFIs in each listed Indian company (as a percentage of that listed company's paid up capital) will be 5% and 10%, respectively. (These limits will apply over and above the caps that currently apply to portfolio investment by foreign institutional investors and non-resident Indians.)
Each QFI will be allowed to invest and trade in Indian equities through accounts held with a single SEBI-registered Depository Participant (DP). QFIs will have to remit money through normal banking channels in freely convertible currencies directly to the DP's single rupee pool bank account maintained with an Indian bank. The DP will be responsible for complying with Indian withholding tax requirements in relation to the QFIs' investment proceeds.
The recent policy moves should help widen the investor base, deepen India's capital markets and increase foreign fund flows to India (which might help strengthen the rapidly falling Indian rupee).