August 24, 2011 in Top Oppurtunities by aloksinha
India opening another window for foreign capital inflows
NEW DELHI: The government allowed qualified foreign investors (QFIs) to buy units up to $3 billion in infrastructure focused debt funds approved by the markets regulator, opening another window for foreign capital inflows.
QFIs are new category of foreign investors who will be allowed to invest in equity schemes of Indian mutual funds. This category essentially comprises foreign individuals, companies and pension funds that are not separately registered as a foreign institutional investor (FII) or a non-resident Indian (NRI) with the Securities and Exchange Board of India (SEBI). QFIs are basically those who have given sufficient proof to banks or regulated brokerages to open a Demat account. A QFI can be an individual (foreign national) pension fund, companies or insurance funds. SEBI is the regulatory authority for investment by QFI’s in India.
It simultaneously put out the rules for such investors to buy directly in equity-based mutual funds for which a $10-billion limit has been fixed, a promise made in this year’s budget. “Qualified foreign investors will be allowed to invest up to $3 billion in debt schemes that invest in corporate bonds of infrastructure companies, the finance ministry said in a release.
The QFI limit for debt will be within the overall ceiling of $25 billion, including FIIs, set by the central bank in corporate debt issued by infrastructure firms. So far, only FIIs and overseas Indians were allowed to buy units of domestic MFs.
Foreign retail investors had to rely on emerging markets or country-specific funds to take an exposure to India. As per the norms notified by the markets regulator, Sebi, the infrastructure bonds should have a residual maturity of at least five years.
“It’s a positive move and will improve depth and liquidity in the corporate bond market, but overall governance in the country needs to improve to attract large-scale flows,” said Amrit Pandurangi, senior director (infrastructure practice) at consulting firm Deloitte Touche Tohmatsu.
Sebi also said that once the cumulative QFI investment in equity schemes reaches $8 billion, it 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 investments in debt hits $2.5 billion.
The opening of infrastructure focused debt funds to foreign investors was proposed by corporate leaders at a meeting with FM Pranab Mukherjee on August 1. A finance ministry official said the limit could be raised later.
Mukherjee had proposed a further liberalisation of foreign investments in his budget speech. Since the finance ministry had already announced a framework for allowing QFIs in Sebi-approved equity funds, it could easily extend the same arrangement for investments in debt funds.
Foreign investors, including individuals, pension funds and trusts, will be able to invest in these debt funds directly by opening a depository account with a Sebi-registered depository or indirectly through unit confirmation receipts, a system akin to the GDRs for investing in shares.
Sebi said QFIs can hold units in a demat account through a depository participant or via unit confirmation receipts that would require domestic MFs to open foreign currency accounts. However, these investors should come from a country that complies with norms issued by the Financial Action Task Force.
The finance ministry will also issue PAN to investors on the basis of KYC (know your customer) norms to keep the process simple, the official said. PAN is an identity code required for all financial transactions.
The procedure for investment?
A QFI can invest in Indian mutual funds in two ways either by opening a demat account with SEBI-registered depositories who will execute their orders and also hold units on their behalf or eligible investors will place orders with a foreign depository for buying units on their behalf.
This depository will in turn place the order with an Indian custodian bank which will purchase the units and keep them with itself. The foreign depository will then issue Unit Confirmation Receipts, or UCRs which are similar to participatory notes, to investors against the units.
