Long overdue

Foreign individuals can now directly invest in Indian stocks. Inflows should pick up gradually

Written by The Indian Express | Published: January 4, 2012 3:09:57 am

It was in 1991-92 when Manmohan Singh,as the finance minister,opened up the country’s capital market for foreign institutional investment (FII) for the first time. That was when the country desperately needed foreign exchange and a big boost to the economy and investment climate. Since then,foreign funds have made cumulative investments of

$ 119 billion — more than a third of India’s foreign exchange reserves. It has taken 20 years for the government to take another path-breaking decision aimed at turning around the sluggish markets and slowing economy. It has now allowed foreign individual investors,trusts and pension funds to directly invest in Indian stocks with a view to increasing the capital inflows,reducing volatility and deepening the market. Foreign individuals now need not register with a sub-account of an FII,which will then get a registration from the Securities and Exchange Board of India (SEBI) — a time-consuming process. They do not have to invest through controversial participatory notes (PN) — which is an offshore derivative instrument issued by brokerages to foreign investors who remain anonymous to the Indian regulators. The new class of qualified foreign investors (QFIs) will attract individual and aggregate investment limits of 5 per cent and 10 per cent respectively of the paid-up capital of an Indian company.

Of course,the government should have taken this step years ago instead of waiting for capital inflows to dry up and the current account deficit looking set to breach the 3 per cent mark. Nobody expects foreigners to bring in the moolah from tomorrow. One can expect inflows to pick up gradually. The icing on the cake is that these limits will be over and above the FII and NRI investment ceilings prescribed under the existing route for foreign investment in India. With this,wealthy investors like Warren Buffet,George Soros or Bill Gates can directly buy any stocks listed on Indian stock exchanges. The government and the markets are looking for more inflows as the investment climate has taken a heavy beating and investors are sitting on huge losses. The Sensex has fallen 24.3 per cent in 2011,making India one of the top losers in the world. Foreign funds have been keeping away from India and other emerging markets with eurozone debt worries adding to their worries. After investing $29 billion in 2010,FIIs have pulled out $357 million from Indian equities in 2011.

How soon dollars will start flowing in will depend on the government’s handling of the growth story,reform measures and fiscal management.

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