Entry of QFIs Finally Enabled
Posted by: Girija Gadre on Sat, Jun 9th, 2012
Do we need them or we don't? The Government has been acting with mixed speed in implementing the decision to allow foreign retail investors (christened QFIs or qualified foreign investors). In the meanwhile, the rupee has depreciated steeply, global institutional capital flows have dried up and the investor interest in Indian capital markets has dwindled. Will the Sebi Circular of June 7, 2012 make a difference?
Despite stated policy intentions since the Budget of 2011-12, QFI investments have not taken off due to lack of clarity. Ambiguous and onerous wording of the circulars also placed a heavy burden of responsibility on the qualified depository participants. In view of market feedback, the Ministry of Finance issued a press release on May 29, 2012. Consequently, SEBI has issued a circular on June 7, 2012 in order to give effect to the Ministry’s recommendations.
What changes now and how does it help?
- QFIs from Europe and Gulf: There was a gap in defining who would qualify as a QFI. The original definition required compliance of a country with FATF (Financial Action Task Force) standards. Individual member countries of the Gulf Co-operation Council and European Commission were not FAFT members, which led to ambiguity. The ministry’s circular removes this ambiguity and allows the 33 member countries of these two blocks to qualify as QFIs.
- Single Rupee Account: QFIs can now open a single non-interest bearing rupee account with an Indian bank for routing the receipt and payment for transactions relating to purchase and sale of eligible securities, subject to conditions, as may be prescribed by RBI. Earlier money was to be kept by Depository Participants in a rupee pooled account. Many investors had reservations to this requirement of pooling funds along with other QFI investors. This also brought the onus of withholding tax on the Qualified Depository Participants.
- Removal of 5-day limit: Earlier, QFIs had to take an investment decision within 5 days of transferring funds into the rupee pooled account. The funds could not lie there for more than 5 days. Considering there was no interest to be earned, this was a needless restriction. Qualified Depository Participants had to bear the administrative hassle of monitoring the 5-day limit and transferring the funds back to the QFI’s bank account. This would also expose QFI funds to forex risk.
- Investment receipts can be redeployed: QFIs have now been allowed to make fresh purchases of eligible securities, out of the sale or redemption or dividend proceeds of any of the eligible securities.
- Combined limit applies: SEBI has clarified that in case a person invests in the same company through both QFI route and FDI route, the total holding of the person in such company shall not exceed five per cent of paid up equity capital of the company, at any point of time. It has been clarified that all the invested securities shall be held in a single demat account of the QFI.
- Can appoint custodians: QFIs can now appoint a custodian of their securities, who would be obligated to perform clearing and settlement of securities on behalf of the client. Custodian has to be however a qualified DP under the QFI guidelines and registered as a custodian with SEBI.
- NRIs can participate: The new norms will also allow non-resident Indians (NRIs) to come through the QFI route, but they will have to close their existing PIS accounts. They can be either QFI or NRI, not both.
These changes make it possible for QFIs to begin to operationalise their investment in Indian securities. But given the gloomy macro economic scenario and the state of the markets, it would take a brave heart of a deep value investor with willingness to take downside risks, to take the plunge.
SEBI Circular dated June 7, 2012
SEBI Circular dated August 9, 2011
SEBI Circular dated January 13, 2012
SEBI Circular dated January 25, 2012
Ministry of Finance Press Release F. No. 10101/2011-ECB dated 29 May 2012
Ministry of Finance Press Release dated January 1, 2012
RBI Circular Dated August 9, 2011
RBI Circular Dated January 13, 2012