The Ministry of Finance supports this notion and recently published a report which addresses the currently complicated regime on foreign investment by proposing a more streamlined framework. The report gears more on foreign portfolio investment and less on foreign direct investment, however recommendations impact both areas.
The report follows on from recent regulations designed to simplify the foreign investment regime – an example being the Consolidated FDI Circular that became effective on 1st April 2010.
Historically the Indian Government opened up various modes of investment to foreigners from 1991 – for example foreign direct investment (FDI), foreign institutional investment (FII), non-resident Indian (NRI) investment, overseas corporate body (OCB) investments and foreign venture capital investments (FVCI) – all of which were subject to varying regulations and serving distinctly different purposes.
However, the last decade has seen continuing regulatory changes which have diluted the distinctions between various investor classes and such overlap has allowed the availability of multiple classes resulting in doubts for foreign investors when it came to opting for the appropriate investment route to adopt in order to invest in India.
The Ministry of Finance thus reviewed the entire policy on portfolio investments and issued its main recommendations as follows:
- Qualified Foreign Investor (QFI) Scheme: It’s recommended that all portfolio investments be brought in through a common scheme which means the current NRI, FII and FVCI regimes are being collapsed into the QFI scheme.
- Percentage Limits: Investment into unlisted or listed securities of an Indian company would be considered as portfolio investment up to 10% shares in each company. If the shareholding is in excess of 10%, then it will be considered as FDI and hence governed under the appropriate policy.
- Participatory Notes: It’s recommended that “SEBI should have the final right to demand details about the end investor in cases of needed investigations”. Moreover, it is expected that a streamlined QFI framework will encourage investors to participate directly in the Indian markets rather than through indirect offshore instruments.
- Debt Instruments: The QFI model is to be extended to debt investments as well in the Indian markets.
- Legal Process: Recommendations propose creating a more transparent legal process including the creation of firstly a financial sector appellate tribunal (to hear appeals on capital flows and management regulations), secondly an institution of processes of public consultation (before issuance of law or policy) and thirdly the creation of “user-friendly access to the law through public information systems”.
Having proposed the changes towards simplifying the policy on portfolio investments one should note that the extent to which these proposals would be translated into action is not yet apparent.
Nevertheless proposals for continued deregulation are noticeably being made and likely to continue as the region continues its financial expansion. With China announcing reduced GDP forecasts, India’s proposals for financial deregulation are likely to keep it in the lime-light as the favoured region for those looking to emerging markets for investment returns whilst the West remains sunken with debt.
