Fund managers say details not practical; unlikely to attract much of investments.
The Securities and Exchange Board of India (Sebi) on Tuesday issued detailed guidelines to allow Know Your Customer-compliant foreign investors, termed as qualified foreign investors or QFIs, to invest in equity and debt schemes in India.
The regulatory move to facilitate mutual funds here to have access to foreign investors is, however, being perceived as “practically difficult” by fund players. Fund managers say the proposed format would be cumbersome for foreign investors and fail to attract investments from abroad.
| WHO IS A QFI? |
| A qualified foreign investor (QFI) is a person residing in a country (other than India) which is a signatory to IOSCO's multilateral MoU and is compliant with FATF standards. He should not be registered with Sebi as a foreign institutional investor or a sub-account. |
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A QFI is a person resident in a country compliant with Financial Action Task Force (FATF) standards and that is a signatory to the International Organisation of Securities Commission's Multilateral Memorandum of Understanding. QFIs should not be resident in India or registered with Sebi as a foreign institutional investor or sub-account.
The aggregate investments by QFIs can be up to $10 billion for equity schemes and an additional $3 bn will be allowed in debt schemes which invest in infrastructure, with a minimum residual maturity of five years. However, Sebi said fund houses can accept subscriptions from QFIs only up to $8 bn in equities and $2.5 bn in debt schemes. The rest ($2 bn in equity and $0.5 bn in debt) would be auctioned by the regulator through bidding.
Sebi has provided two routes for QFIs to invest in Indian MFs. The first is the direct route, whereby foreign retail investors can hold MF units in demat accounts through a Sebi-registered depository participant (DP). In the indirect route, foreign-based distributors or agents will come into play.
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For the purpose, qualified DPs (which should have a minimum paid-up capital of Rs 50 crore) will open a demat account for QFIs after ensuring all the requirements. Depositories will also have to open a separate rupee pool bank account solely for the purpose of investments by QFIs in India.
Through the direct route, QFIs will have to file needed information for the purpose of obtaining a permanent account number (PAN). However, fund managers say investors may not find this attractive.
Thomas Mathew, joint secretary, capital markets, in the Union ministry of finance, said, “We are looking at investors who are bullish on India’s growth story. I see medium-term good flows into the country. This will give more stability to Indian financial markets.”
DISSENT
Saurabh Nanavati, chief executive officer of Religare Mutual Fund, says, “It's a great idea but the process needs to be more practical. Getting a local PAN and KYC done will not excite a foreign investor, who already has other India offshore funds which he can subscribe to without any additional documentation. Distributor remuneration will also be an issue, since we do not have entry loads like other markets."
Agrees Akshay Gupta, CEO of Peerless MF: “It is not so that foreign investors are not invested in India. They have taken the Indian equities exposure through offshore feeder funds. We do not expect immediate inflows; it will take time.”
These investors are only to be allowed to subscribe and redeem. They have not been given facilities of Systematic Investment Plans and cannot switch between schemes. More, the market regulator said fund houses would be held responsible for the deduction of applicable tax at source out of the redemption proceeds before making redemption payments to QFIs. “Taxation is a big issue," says Puneet Chaddha, CEO of HSBC MF. “There should be more clarity."
The indirect route will involve intermediaries. There will be four parties involved -- QFIs, Issuers of Unit Confirmation Receipt (UCR), a Sebi-registered custodian and MFs. The UCR issuer will be based abroad and has to be appointed by fund players to act as their agents. MFs will need Sebi approval before appointing UCR issuers.
This is another tough task, say fund managers. Sundeep Sikka, CEO of the country’s largest fund house, Reliance MF, says, “The challenge is how to sell India’s growth story outside.”
Industry experts say that a time when margins are under severe pressure, it’s not possible to open offices abroad and sell products. Fund managers have shown their priority for the direct route over the indirect route. “Appointing a UCR issuer is not an easy task at a time when overseas investors get better incentives than domestic distributors,” adds a CEO.
The domestic fund industry has been witnessing erosion in its equity assets. So far this year, these assets have been squeezed by around six per cent, to 23 per cent of the industry’s overall assets under management.