To widen class of investors, attract foreign funds, reduce market volatility

In a major policy decision, the Centre said it would allow Qualified Foreign Investors (QFIs) to directly invest in Indian equity market in order to widen the class of investors, attract more foreign funds, reduce market volatility and deepen the Indian capital market.

The move comes in the wake of permission given to the QFIs to have direct access to Indian Mutual Funds schemes that were announced in the Union budget. The new scheme is expected to be operationalised by January 15 after the regulators, the Reserve Bank of India (RBI) and the Securities and Exchanges Board of India (SEBI), issue relevant circulars, an official release said on Sunday.

The scheme also comes in the wake of a sizeable foreign capital outflow from the Indian equity market that led to volatility of the rupee. Significant outflow by FIIs saw the rupee plunging to an all-time low of over Rs. 54 against the dollar last month.

Robust growth

Foreign capital inflows to India have significantly gained importance over the years. These flows have been influenced by strong domestic fundamentals and buoyant yields, reflecting robust corporate sector performance.

In the present arrangement relating to foreign portfolio investments, only Foreign Institutional Investors/sub-accounts and Non-Resident Indians are allowed to directly invest in the Indian equity market.

A large number of QFIs, in particular a large set of diversified individual foreign nationals who are desirous of investing, do not have direct access to it.

Direct access

As a first step in this direction, the QFIs were permitted direct access to Indian Mutual Funds schemes and, as the next step, it has now been decided to allow QFIs to directly invest in the Indian equity market.

The QFIs would be individuals, groups or associations residing in a foreign country that is compliant with the Financial Action Task Force and that is a signatory to The International Organisation of Securities Commissions's multilateral MoU. The QFIs do not include FII/sub-accounts.

Under the scheme, the RBI would grant general permission to the QFIs to invest in the Portfolio Investment Scheme (PIS) route similar to FIIs. “The individual and aggregate investment limit for QFIs shall be 5 per cent and 10 per cent respectively of the paid-up capital of an Indian company,” the release said. These limits shall be over and above the FII and NRI investment ceilings prescribed in the PIS route for foreign investment in India.

The QFIs shall be allowed to invest through the SEBI-registered Qualified Depository Participant (DP), with the QFI required to open only one demat account and a trading account with any of the qualified DP and make purchase and sale of equities through that DP only.

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