India’s New Year present to Foreign Capitalists: Invest in Stock Markets

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A security guard walks inside a Giorgio Armani showroom in a shopping mall in Mumbai. Photo - Danish Siddiqui/Reuters

What is likely to be a perfect New Year present for capitalists, Indian government on 1st Jan 2012 announced it will allow qualified foreign investors (QFIs) to invest directly in Indian stock markets. Until now, QFIs were allowed to invest only in mutual funds.

The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are expected to issue relevant circulars to put the scheme into operation by 15 January.

“As the next logical step, it has now been decided to allow QFIs to directly invest in the Indian equity market in order to widen the class of investors, attract more foreign funds and reduce market volatility and to deepen the Indian capital market,” the finance ministry said in a statement.

Financial analysts say that the government is opening a new avenue for investmentby allowing QFIs which were earlier controlled by foreign institutional investors. Foreign nationals, who wanted to invest in Indian stock markets, came through the sub-account route. Non-resident Indians were, however, permitted to invest directly.

“The QFIs shall include individuals, groups or associations, resident in a foreign country which is compliant with FATF (Financial Action Task Force) and that is a signatory to IOSCO’s multilateral MoU. QFIs do not include FII (Foreign Institutional Investor)/sub-accounts,” the government communiqu added.

The move is expected to lure wealthy investors, both individuals and organisations, from 80 countries who will be eligible to invest as QFIs.

Experts say the move is a natural reaction to contain the current currency issues that plague the Indian government including the faltering Indian rupee whose value plummeted by 24 per cent against dollar last year. Double digit inflation, slowing growth and a widening current account deficit are the other woes New Delhi will have to battle during the new year.

Bombay Stock Exchange (BSE) Sensex shed close to 25% in 2011, making it the worst-performing major equity market in 2011. The total funds inflows in 2010 was $29 billion. However, due to growth falling below 7%, net outflows exceeded $450 million.

Some analysts believe that though allowing QFIs to invest in Indian equity markets is a positive sign, it is unlikely to make an immediate impact and would not be able to increase the inflows due to weak market conditions.

“At a time when the foreign institutions are reducing their exposure to India, it would not be prudent to expect foreign individuals to start investing in our markets,”Jagannadham Thunuguntla, research head at brokerage SMC Global Securities told Reuters.

India, Asia’s third-largest economy, is taking measures to further liberalise its economic policies. However, the recent announcement of the opening up of India’s retail sector to foreign investment had to be backtracked following political opposition.

Sources: Economic Times, SEBI, Gulf News, Reuters

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