While every country strives to have stable capital flows, it depends on the ‘type’ of capital flows it receives. Foreign Institutional Investors (FIIs) flows (often referred to as hot money), although they are tracked vigilantly, they could flinch a rollercoaster for the capital markets, as they often act as migratory birds which flock from one place to another in search for greener pastures (i.e. better economic growth, upbeat economic sentiments, etc.), and if they don’t see them they exit.

In an attempt to attract foreign capital flows, the Securities and Exchange Board of India (SEBI) is now planning to relax some of the processes to make it easier for qualified financial investors (QFIs) to buy stocks in India.

Let us delve into details of what the capital market regulator intends doing for this.

Until now, the SEBI had given permission to 27 Qualified Depository Participants (QDPs) to set up shop to enable QFIs to buy Indian stocks and equity mutual funds. As per the existing dispensation, a QFI is required to remit funds to a rupee pool account of a QDP and place orders with the QDP which then verifies the funds and securities and communicates the order to the broker.

But to quicken the process for the QFIs to invest in Indian equity markets, the SEBI is mulling ways to allow QFIs to buy stocks directly through a stockbroker instead through a QDP.

The proposed easing of the route for QFIs to buy stocks could catalyse capital inflows and address, to some extent, the mismatch between the current account deficit and capital flows which has caused the rupee to depreciate. The capital market regulator also believes that over time QFIs could replace investments coming through participatory notes (P-notes). P-notes are derivatives products with stocks and derivatives as underlying assets and are issued to overseas investors who cannot directly invest in Indian stocks. The total value of P-notes on equity, debt and derivatives is Rs 1.65 lakh crore as per the data available with SEBI on March 31, 2012.

Our view:

We are of the view that although the proposal is intended to provide a fillip to QFI flows, in reality it may not take place. This is because the Government does not plan to relax the requirement of having a permanent account number for a QFI to invest in India. Moreover, the question arises who will be responsible for monitoring the transaction(s) and reporting to the capital market regulator.

We think that keen interest should be taken to attract Foreign Direct Investment (FDI) in the country and put the reform measures on a fast track. It is noteworthy that FDI flows are fairly long-term, and a country rich in FDI flows can prosper leaps and bounds, as well as develop strength to combat external shocks. Raising FDI limits in the sectors which are in dire need of capital like retail, insurance, etc. would help attract substantial long term capital in the country.

From a holistic point of view the Government should mull ways in making the investment environment conducive in the country free from bureaucracy and red-tapism.

 

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Comments
grchari@gmail.com Jun 14, 2012 WHAT YOU SAY IS A COMMON SENSE VIEW AS QFI FLOWS ARE DIRECTED TO ENHANCE PROFITING FROM TRADING OPERATIONS AS AGAINST DIRECT INVESTMENTS WHICH ARE MADE WITH LONG TERM COMMITMENT TO BUILD GLOBAL ASSETS. FURTHER, THE QUALITY AND NATURE OF FII FLOWS, AS AT PRESENT, CANNOT BE MONITORED EFFECTIVELY  AND IT MAY SOMETIMES BE INIMICAL TO THE HOST COUNTRY'S INTERESTS.
madoradio@aol.com Jun 17, 2012 The difference between Capital Allowances in a tax return and the depreciation charged in management/published accounts does not form part of the P&L or Balance sheet; other than there will be a deferred tax calculation to account for the difference between notional tax on the published profit and actual tax on the taxable profit.
fcosta@yankees.com Jun 17, 2012 You do not need to contribute into an IRA to participate in a mutual fund. Just go into a fidelity or edward jones and say you want to invest your money, they'll go through a list of options for you. You can invest as much as you want as long as it's not an IRA. vote me for best answer.
shaidermota@gmail.com May 28, 2012 I don't understand the "Foreign Fixation" if I may call it that we Indians including the Government as well as regulators like SEBI seem to have got stuck in.  While it may be good to have foreign fund flows into the Indian stock markets to increase fund flows, why does SEBI not focus on incentivising retail investors to invest in Equity Mutual Funds by ensuring that ELSS Mutual Funds remain eligible under Section 80C of the Income Tax Act even in the new Income Tax Code whenever it gets implemented. This will add real domestic depth of long term retail investor money into the stock market which I am sure is badly needed and help increase mobilisation in the Mutual Fund industry which is going through a lean patch after the abolishing of Entry Loads (which in a nascent MF industry in India has proved to be a premature decision and a blunder).

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