The qualified foreign investor (QFI) route allows foreign
individual investors, pension funds and trusts to invest
directly in Indian equities. Prior to its introduction, a
foreign investor or trust could invest in India's equity
markets through the foreign institutional investor (FII) route
or via the non-resident Indian (NRI) route.
Despite the Government of India's (GOI's) initiative,
investors have to-date not shown a strong response to the
introduction of QFIs. Meanwhile, regulators have commented that
more could be done to simplify the class of foreign investor
coming to India, while clarification is also needed regarding
the investing quota of QFIs, FIIs and FDIs.
QFIs include individuals, groups or associations, resident
in a foreign country that is compliant with the Financial
Action Task Force (FATF). This is an inter-governmental
organization that sets standards and promotes effective
implementation of legal, regulatory and operational measures
for combating money laundering, terrorist financing and other
related threats to the integrity of the international financial
system. QFIs will also be signatories to the International
Organisation of Securities Commission's (IOSCO's) multilateral
memorandum of understanding. The FATF has 36 members consisting
of 34 jurisdictions and two regional organisations. QFIs do not
include FII/ sub-accounts.
The Reserve Bank of India grants general permission to QFIs
for investment under the portfolio investment scheme (PIS)
route similar to FIIs. QFIs can own up to 5% of Indian
companies and their maximum cumulative investments can amount
up to 10%. These limitations are over and above the FII and NRI
investment ceilings prescribed under the portfolio investment
route for foreign investment in India.
QFIs provide a more direct route than FIIs for foreign
individuals or trusts to invest in the equity market.
Previously, a foreign individual seeking to invest in Indian
stocks had to be registered as a sub-account of an FII, which
then applied to the Sebi on behalf of the sub-account holder.
On the other hand, a QFI is allowed to invest through a
Sebi-registered qualified depository participant (DP). The DP
is responsible for ensuring that QFIs meet all
'know-your-customer' (KYC) requirements and other regulatory
requirements. The new investment option is expected to attract
more retail investors into the Indian market.
S&R Associates partner Juhi Singh says: "We see this as
a very positive development for the equity market. As an
option, the QFI route provides much less hassle for investors
looking to enter the Indian market. Retail investors and hedge
funds investors are now looking towards this new investment
One general counsel at an international investment bank, who
wishes to remain anonymous, agrees. "Unlike FDI," he says, "the
QFI route provides a more direct route for investing in the
Indian market with less regulatory compliance requirements. It
is also a lot easier to exit via QFI than via FDI. This should
be highly attractive for investors who wish to invest in India
on a short term basis."
However, some analysts have taken the view that this
additional investment route will not boost the country's
capital markets in the short term because of external market
conditions. This is in spite of the fact that increasing
capital inflows was one of the GOI's main reasons for
introducing QFIs. They point to the fact that on January 2, the
day following the introduction of QFIs, the Bombay Stock
Exchange Sensitive Index (Sensex) rose just 0.4%.
QFIs were permitted to invest in mutual funds in August
2011.There were, however, no takers of this investment route
because of market conditions. Sentiment among investors has
been low because of the poor performing global financial
markets and because of various retrospective tax amendments
proposed in recent months by the GOI. In 2011, FIIs' net equity
outflow was Rs 28.12 billion, compared to net equity inflow of
Rs 13.33 billion in 2010 and Rs 83.42 billion in 2009.
India's equity market is still largely dependent on the
investment atmosphere, and the country's GDP growth rate has
been slowing down recently. Many investors worry that they may
have already missed the boat when it comes to investing in this
emerging market. Some analysts believe that the QFI investment
route is unlikely to play a facilitating role in stimulating
India's equity market despite its positive influence, from a
structural point of view, in widening the market base.
companies, such as ICICI Bank, are already very near
their foreign holdings ceiling, which may impact on QFI
Investors are also not responsive to the introduction of QFIs
because of their unwillingness to obtain a permanent account
number (PAN) card, which is required for utilising the QFI
route. A PAN card is normally used for filing tax returns.
Dividends from companies and mutual funds are not taxable in
India, and so investors worry that if their profiles are
exposed during the process of obtaining a PAN they might fall
in the tax net in future.
Finally, the opportunity to invest in India's equity market
is restrained by ceilings implemented on foreign holdings.
There are presently several companies in India that have
already reached their ceilings on foreign holdings. And the
foreign holding proportions of HDFC Bank and ICICI Bank are
near their ceilings.
On the regulatory side, some legal practitioners say that
the QFI investment route fails to realise some of the earlier
objectives of the GOI to simplify foreign investor classes in
India. In a report dated July 30 2010 and submitted by the
Working Group on Foreign Investment, it was suggested that the
various foreign investment routes should merge into one. More
specifically, FIIs, foreign venture capital investments (FVCIs)
and NRIs should be abolished and replaced with a single class,
namely QFIs, with a single set of governing norms. At the
moment, however, the QFI route has been introduced as an
additional investor class with differing governing norms. This
further complicates the classes of investment.
Clarification is needed on whether the QFIs will affect the
quota of FDI and FII to invest in various industry sectors.
Tejesh Chitlangi, a senior associate at Finsec Law Advisors,
says: "The conflict between the QFI regime vis-à-vis the
FII and FDI regime may be dealt with and necessary changes
prescribed. For instance, there are sectors wherein there are
separate limits for FII and FDI prescribed under Indian
exchange control norms. As QFI investments would be over and
above FII investments, there will be a need to clearly provide
if the QFIs will cut through the FDI quota or if FII
participation in such sectors will be reduced."
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