Foreign retail investors may get to buy Indian shares

Finance ministry looks to relax investment norms so that individuals can buy shares in Indian companies

The finance ministry is considering a proposal to relax investment norms and allow foreign individuals to directly buy shares of Indian companies. Current guidelines permit only foreign mutual funds to directly invest in the domestic bourses.

There is a view that the government should not distinguish between India focused mutual funds and foreign retail investors, a finance ministry official said,adding that a final decision is yet to be taken. However,if the move goes through,the government would set a ceiling on investments by foreign individuals.

This was also one of the key recommendations of the committee chaired by UTI AMC chairman U K Sinha on foreign investment,which recently submitted its report to the finance ministry. As part of its recommendations on a single window for portfolio investments,the committee has laid out a system where a foreign individual can trade in the Indian securities market without ever setting foot in India.

A similar suggestion was also made by the Tarapore Committee in 2006,which had said,all individual non-residents should be allowed to invest in the Indian stock market through Sebi registered entities including mutual funds and Portfolio Management Schemes who will be responsible for meeting KYC and FATF norms and that the money should come through bank accounts in India.

Analysts welcomed the move and said it would lead to stability of the stock markets. Traditionally retail investors tend to be invested for a longer duration than FIIs. It is a very commendable recommendation of the committee and will give the market more stability, said Ashvin Parekh,partner and national leader,financial services Ernst and Young.

The finance ministry recently increased the overseas investment cap for government and corporate bonds by $5 billion each,taking the total to $30 billion.

The decision comes at a time when foreign institutional investors (FIIs) have pumped a record $21.42 billion in the equity market so far in 2010,pushing the Bombay Stock Exchange Sensex to over 20,000 points.

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However,the government does not seem too perturbed and finance minister Pranab Mukherjee ruled out any plan to curb foreign capital flows. As far as the FII and FDI to India are concerned,I do not consider that it is going to be too volatile in the present situation, he said.

Market regulator Sebi too has exuded confidence that there would not be any reversal in foreign fund inflows. As long as India is on a growth path,I dont think we should think of reversal. Certainly,there will be a slowdown because there will not be all years in which we will see massive inflows,but that is something as the system grows,it learns to deal with these things, Sebi chairman CB Bhave told a television news channel on Thursday.