The government today allowed foreign investors, in its newly-created Qualified Foreign Investors (QFIs) category, to invest up to $13 billion in equity and debt schemes of mutual funds, a move aimed at enhancing depth in the capital market.
The announcement comes at a time when there are concerns over the flight of foreign capital and is expected to provide much needed succour to the markets.
"It has been decided that the aggregate investments by QFIs in equity schemes of the mutual funds under direct and indirect routes shall be subject to a ceiling of $10 billion," a finance ministry statement said.
Similarly, QFIs can invest up to an additional amount of $3 billion in the units of mutual fund scheme, which invest in infrastructure debt of minimal residual maturity of five years in corporate bonds issued by infrastructure companies, it said.
QFI is an individual, group or association, resident in a foreign country that is compliant with the Financial Action Task Force (FATF) standard.
It is to be noted that QFIs do not include foreign institutional investors or sub-accounts as these are already permitted to invest in equity and debt markets in India.
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This would enable QFIs to have direct access to the Indian mutual funds. It would widen the class of investors participating in the Indian capital market, help increase depth and reduce volatility in the market, it said.
Both Reserve Bank and Securities and Exchange Board of India (Sebi) issued enabling notifications in this regard.
Dividend payments on units held by QFIs would have to be directly remitted to the overseas accounts of the QFIs by the domestic mutual funds and dividend payments to QFIs would not be allowed as an eligible credit to the single rupee pool bank account, the RBI said in its notification.
The Sebi in a separate notification said QFIs can buy units of equity or debt funds in the primary market, but cannot trade in the secondary market.
The capital market regulator also said that when the cumulative QFI investment reaches $8 billion in equity schemes, SEBI would auction the remaining limit to foreign investors who can then buy the units from funds of their choice.
A similar process will be followed when the investment in debt hits $2.5 billion.
The QFI limit for debt will be within the overall ceiling of $25 billion, including FIIs, set by the RBI in corporate debt issued by infrastructure companies.