A new regime for foreign portfolio investors introduced on June 1st is likely to improve fund flows into India, according to a market expert.
The new foreign portfolio investors (FPI) regime, introduced by market regulator Securities and Exchange Board of India (SEBI) just days after a new government led by Narendra Modi was sworn in, is expected to offer a simpler registration process for investors entering the financial markets, and thereby attract higher investments.
'The new regime will help attract those investors who may have been "on the fence" due to apprehensions of the process to enter the market,' Kapil Seth, head of HSBC Securities Services in India, told Citywire Asia.
Under the new regime, foreign institutional investors, their sub-accounts and qualified foreign investors will come under one class of investors called 'foreign portfolio investors'.
The registration process of foreign investors has also been decentralised: investors can now register with multiple designated depository participants who have been authorised to issue FPI licenses.
Under the previous system, foreign investors had to register directly only with SEBI, which delayed the entire process, according to Seth.
Knowing your client
In addition, a risk-based ‘know-your-client’ approach has also been introduced across different types of foreign investors.
‘Know your client’ requirements refer to the customer identification process used by financial institutions in India. The measures are aimed at preventing the use of financial entities for money laundering.
'Further, the FPI regulations permit a wider set of investors to access India including individuals, corporates and non-broad based funds, overall making India open to any portfolio investor subject to the appropriate "know-your-client" requirements,’ adds Seth.
However, not everyone believes the new regime will have a significant impact on encouraging more investors into India. 'The registration process is already very streamlined. The new regime won’t make any difference,’ says Ajay Argal, head of equities and lead manager of the Baring India fund.
‘The process is very smooth right now. Foreign institutional investors don’t have any issues with it. It’s more fine-tuning,’ the Hong Kong-based fund manager added.
Under the new system, FPIs are classified into three categories based on perceived risk, with different levels of documentation required for each category, according to HSBC, which is a designated depository participant.
The new set of regulations marks the latest step by the market regulator and/or the central bank towards encouraging and easing the access of foreign investors to Indian markets.
Last year, the Reserve Bank of India increased the foreign portfolio investment limit in government bonds to attract more foreign investments into the country.
According to SEBI data, foreign institutional investors have invested more than $186 billion in Indian markets (stocks and bonds) since 1992, when the markets were first opened to foreign investors.
In recent years, interest from overseas investors has surged: in 2014 alone, foreign institutional investors pumped nearly $16 billion into Indian financial markets.