The finance ministry is looking into a proposal that would allow overseas retail investors to invest directly in Indian equity markets. This is part of a review of the overall regime for the participation of foreign investors in primary and secondary markets.
The move was proposed by the UK Sinha committee, which recently submitted its report to the government. At present, foreign investors with a net worth of over $50 million can register as sub-accounts of a foreign institutional investor and buy Indian stocks. Alternatively, they can come through India-focused funds.
An official privy to the regulatory discussions said that no decision on the issue has been taken so far, although an internal review of all the recommendations was underway. If the finance ministry agrees to the proposal, it will require the concurrence of Securities and Exchange Board of India (Sebi) and Reserve Bank of India (RBI).
The development comes at a time when there is an ongoing debate over the use of checks to limit foreign inflows. Foreign institutional investors have pumped a record $21.24 billion into Indian equities this year, resulting in the rupee rising by 4.5 per cent against the US dollar so far this year to close at Rs 44.44 against the dollar today. Compared with last December, on the basis of the six-currency real effective exchange rate, the rupee appreciated by 8.57 per cent until mid-August, the latest period for which RBI data is available.
A section in the government is, however, of the view that retail investors will not pump enough money into the Indian equity market to significantly influence capital flows or the movement of the Indian currency.
The UK Sinha committee had suggested a review of the registration norms for non-resident individuals to bring about greater transparency. It had pointed out that under current Sebi regulations, individual investors need to have a net worth of not less than $50 million to register as a sub-account of an FII.
"There are, no doubt, investors of net worth less than this amount, who would legitimately be interested in investing in India. Currently, P-notes may only be issued to counterparties that fulfill Sebi-specified requirements," the committee said.
It had suggested that by further opening up portfolio investment through the proposed qualified foreign investors framework to individuals with less than $50 million net worth would increase levels of investment, while reducing the incentive to participate in P-notes. Under the QFI framework, a foreign entity, it was proposed, can approach a depository participant, and if it fulfills the criteria, is allowed to open the required accounts and get a permanent account number to trade.
