With a view to attract more foreign funds and strengthen the Indian capital market, the government has announced a new scheme under which foreigners will be able to invest directly in the Indian equity market.
Expected to be operationalised from January 15, the new scheme allows a foreign individual, a foreign pension fund or even a foreign trust to invest directly in the equity market. These investors will be called ‘Qualified Foreign Investors’ (QFIs).
Citing that foreign investors are already allowed direct access to Indian mutual fund schemes, the Finance Ministry said that its latest decision is merely ‘the next logical step’ in the same direction.
“This has been done in order to widen the class of investors, attract more foreign funds, reduce market volatility and deepen the Indian capital market,” said the Finance Ministry in a statement.
Currently, foreign individuals and foreign institutional investors (FIIs) can invest in the equity market only through sub-accounts with registered FIIs whereas unregistered foreign individuals and institutions invest through participatory notes (PNs).
But while the government has decided to grant foreigners direct access to Indian equity market, investment is restricted to QFIs from countries that are compliant with the Financial Action Task Force (FATF) recommendations and are signatories to the international body of securities market, IOSCO’s, memorandum of understanding.
This condition will allow investors from over 80 countries to access the Indian equity market. Investors from countries such as Pakistan and the like won’t be able to benefit from the scheme.
Salient Features of the Scheme:
- RBI would grant general permission to QFIs for investment under Portfolio Investment Scheme (PIS) route similar to FIIs.
- The individual and aggregate investment limit for QFIs shall be 5% and 10% respectively of the paid up capital of Indian company. These limits shall be over and above the FII and NRI investment ceilings prescribed under the PIS route for foreign investment in India.
- QFIs shall be allowed to invest through SEBI registered Qualified Depository Participant (DP). A QFI shall open only one demat account and a trading account with any of the qualified DP. The QFI shall make purchase and sale of equities through that DP only.
- DP shall ensure that QFIs meet all KYC and other regulatory requirements, as per the relevant regulations issued by SEBI from time to time. QFIs shall remit money through normal banking channel in any permitted currency (freely convertible) directly to the single rupee pool bank account of the DP maintained with a designated AD category – I bank. Upon receipt of instructions from QFI, DP shall carry out the transactions (purchase/sale of equity).
- DP shall be responsible for deduction of applicable tax at source out of the redemption proceeds before making redemption payments to QFIs.
- Risk management, margins and taxation on such trades by QFIs may be on lines similar to the facility available to the other investors.
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