The year 2011 was not a great year for the Indian economy. The year started with robust projections of 8.5% growth in GDP, however by year end the figure has been revised to 7%. To make matters worse, political disunity and slow decision making (if any) over crucial issue of FDI and a depreciating rupee has ensured the year ended in economic gloom. However, on January 1, 2012 the central government took an important decision of allowing QFIs to invest directly in Indian stocks- a decision that has the potential to directly impact the quality of foreign investments in India and ensure stability in Indian markets.
QFIs or Qualified Foreign Investors include foreign individuals, foreign pension funds and foreign trusts. These were earlier allowed to invest in Indian market only in mutual funds. This decision of allowing the QFIs to directly invest in Indian stock will definitely make the Indian stock market much more lucrative to these players as they will be able to buy stocks of their own choice.
India has long disallowed foreign individual investors to invest directly in Indian stocks for fear of slush money and funds from dubious sources. This has resulted in access through Participatory Notes and Derivative instruments that allow holding of stock anonymously. This is going to change with the present decision as only investors from jurisdictions that are signatories to anti-money laundering rules are allowed to invest through this process, thus enabling a higher quality of investments. Moreover, this method will also enable in proper implementation of KYC (Know Your Customer) norms and also help Indian government to tax the capital gains made on Indian stock.
The decision to allow QFIs to directly invest in Indian stocks also holds a lot of promise for the Indian industry, especially as Indian companies are increasingly getting global. For instance, infrastructure major L&T is investing heavily in gulf, so an investor in Gulf States would be more aware of L&T and will invest in it. If we consider IT major Infosys, an investor in US can now directly invest in it- so the investor must be aware of the company’s strengths and long term growth prospects and hence will most likely be for medium to long term, thus ensuring stability for the company. However for this scheme of things to be successful, there needs to be wider participation of state owned banks and also forging partnerships with entities like Abu Dhabi Commercial Bank which are better equipped to handle the KYC norms for local investors.
The Indian market looks particularly lucrative now owing to the depreciating rupee and chances are that the rupee will now begin to move upward. The biggest loser if this scheme actually takes off will be the off-shore funds set up to invest in India. Moreover, the Indian stocks are trading at almost 15-20% lower than last year, thus signifying the perfect time for QFIs to act and presence of Indian banks in many major international locations will also facilitate the process- overall a win-win situation for the Indian economy. What remains to be seen though is whether the decision is actually implemented- till then, let’s keep our fingers crossed.
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