Foreign investors will now be able to access India's equity and infrastructure debt markets by buying units of rupee denominated Indian mutual funds.
In a joint move by India's Ministry of Finance, the Reserve Bank of India (RBI), and the Securities and Exchange Board of India (SEBI) the rules affecting foreign investment in domestic mutual funds have been significantly liberalized.
Under the new rules, a foreign resident individual, group or association will be able to invest in the equity and infrastructure debt schemes of SEBI registered Indian mutual funds. To do so, 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.
Foreign investors meeting these conditions will be called qualified foreign investors (QFIs) and will be able to invest in the Indian equity and infrastructure debt mutual funds in one of two ways.
A QFI will be allowed to hold the Indian mutual fund's units directly in a dematerialized account opened with a SEBI registered depository participant. Alternatively, a QFI may elect to hold the Indian mutual fund's units indirectly, though a type of depository receipt—called a unit confirmation receipt (UCR). These UCRs will be issued by overseas issuers that will be appointed by the concerned Indian mutual funds.
The new rules have caps on the total QFI investment that will be permitted in each Indian mutual fund—USD 10 billion for equity schemes, and USD 3 billion for infrastructure debt schemes. In addition, the units or UCRs held by QFIs will not be tradeable or transferable, but they can be redeemed and the proceeds repatriated.
The QFI rules will not affect investment by SEBI registered foreign institutional investors (FIIs). In fact, the QFI rules explicitly exclude such FIIs and their sub-accounts.
The government expects the new QFI rules will provide foreign investors with a further opportunity to access India's equity and infrastructure debt markets. Hopefully, this scheme will also provide an additional source of much needed liquidity for India's capital markets.