The QFI investment route was introduced by the Indian
government in January 2012. How does this work?
To achieve higher foreign capital inflows, the government
has allowed qualified foreign investors (QFIs) to invest
directly in the Indian securities market. QFIs can invest in
the equity shares of listed Indian companies, corporate debt
segments and the units of domestic mutual funds. QFIs need to
be resident in either of the following: a Financial Action Task
Force compliant country or any country that is part of the Gulf
Cooperation Council or European Commission.
QFIs will need to open an account with a qualified
depository participant (QDP). All trades will be routed through
a QDP and a QDP will empanel brokers for execution of a
transaction. As per the recent clarification issued by the
finance ministry, clients have been allowed to open an
individual non-interest bearing rupee bank account with an
authorised dealer. Investment in a company by QFIs is subject
to an individual limit of 5% and an aggregate investment limit
of 10%. A separate limit of US$1 billion has been created for
QFIs to invest in corporate bonds and the debt schemes of
How does the QFI route differ from the FII route?
The QFI regime is meant for non-institutional investors
although it allows for individuals, family offices, corporates
and institutions to invest in Indian securities subject to
certain conditions. It is envisaged that QFIs will directly
invest in equities, corporate bonds and mutual funds as retail
investors. On other hand, foreign institutional investors
(FIIs) are treated as qualified institutional buyers (QIBs).
They are required to register with Sebi, they have disclosure
requirements, and they are also allowed to register their
clients as sub-accounts and issue offshore derivative
Apart from equities, corporate bonds and mutual funds, FIIs
can also invest in government securities, commercial paper,
securities receipts, equities and interest rate derivatives.
QFIs need to post upfront margin to trade equities, while FIIs
do not need to do so. QFIs also do not need to appoint a local
custodian, unlike FIIs. And QFIs need to open an account with a
QDP and a non-interest bearing bank account with an authorised
Do you see this as a positive development for the Indian
Allowing foreign investors to come in as QFIs is a step in
the right direction. Over a period of time, this will become a
significant route for investment in the Indian capital
Which entities are most likely to employ the QFI investment
High net worth individuals and family offices will be some
of the major investors in the QFI space. This route allows QFIs
to invest directly in India and provides them with an ability
to diversify their portfolio. Also, institutions and corporates
that were earlier planning to enter the Indian market through
the FII sub-account route may also consider directly investing
through the QFI route.
How well has the introduction of the QFI route been
QFIs will help deepen the Indian equity market and achieve
higher foreign capital inflows. With the current global
environment, and market conditions in India, we have not yet
seen major investments through this route however. Investors
have also raised issues, such as the requirement for all orders
to be routed through a depository participant, the need for a
permanent account number (PAN), and the need to file tax
returns in India. This all needs to be looked into.
The requirement of conducting in-person verification of QFIs
by depository participants is also difficult as QFIs will be
based out of India. It will be helpful if offshore affiliates
of QDPs are allowed to do this verification. Also, most of the
developed countries have stringent solicitation norms for
soliciting investors in their jurisdiction. There needs to be
an understanding between the regulators whereby local QDPs are
recognised by foreign regulators and are allowed to solicit
clients in their jurisdiction.
From the recent clarification issued by the finance
ministry, we understand that Sebi and the tax authorities may
provide further clarification in near future to alleviate some
of these issues.
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