While the Centre has allowed qualified foreign investors and individuals, it may not lead to significant inflows in future.
Poor risk appetite among global investors is likely to keep most foreign individuals away from entering the Indian stock market in the next few months, despite being allowed direct entry.
The Union government on Sunday said overseas individuals, groups or associations, called qualified foreign investors (QFIs), would soon be allowed to directly participate in the Indian stock market. At present, only foreign institutional investors (FIIs) or their sub-accounts and non-resident Indians (NRIs) are allowed to directly invest in the equity market.
Experts believe the move will benefit the market in the long term, but its impact will be minimal in the coming months.
“The market is not buoyant right now to attract inflows from foreign retail investors. It’s a good step, but it will take at least a couple of years to take off significantly,” said Motilal Oswal, chairman and managing director at Motilal Oswal Financial Services. “Even when foreign institutional investors (FIIs) were allowed in the Indian stock market, the response was slow in the first few years.”
Domestic factors like high inflation, rising interest rates and governance issues, coupled with global concerns like the euro zone debt crisis and slowdown in the US, have sapped investors’ appetite for Indian stocks.The Bombay Stock Exchange (BSE) benchmark, the Sensex, lost nearly 25 per cent last year.
After pumping in a record $29 billion (~1,33, 266 crore) in 2010, FIIs withdrew $358 million (~2,71 crore) from Indian stock market in 2011, according to data available on the Securities and Exchange Board of India (Sebi) website.
The government’s earlier step allowing foreign retail investors direct access to Indian mutual fund schemes has not been successful so far. In August, Sebi had issued detailed guidelines to allow QFIs direct entry in equity and debt schemes of domestic mutual fund houses. However, the move has not taken off, due to stringent know-your-client norms such as mandatory permanent account number and tax filing details, according to mutual fund officials.
In a recent meeting with Sebi Chairman U K Sinha, senior fund officials had requested the regulator to relax these norms.
Experts believe direct entry of QFIs will diversify foreign investment in Indian shares and reduce the volatility over the long term. “It’s a positive step. Because of this, the Indian stock market will directly attract investments from different type of foreign investors like corporates, individuals and trusts. That will diversify foreign investment in the country and reduce the risk of herd mentality of FIIs,” said Nirmal Jain, founder and chairman of IIFL (India Infoline). “It will take time to attract flows from QFIs. How and when that will happen will depend on market conditions.”
According to a government statement, QFIs will be allowed to invest through qualified depository participants (DP) registered with Sebi. They will be allowed to open only one demat accout and trading account with any qualified DP.
The individual and aggregate investment limit for QFIs would be five per cent and 10 per cent, respectively, of the paid up capital of Indian company, which will be over and above the prescribed FII and NRI investment ceilings.
The Reserve Bank of India (RBI) and Sebi are expected to issue relevant circulars to operationalise the scheme by January 15.
