India opens up to foreign individuals – to an extent

Earlier this month, India announced details of its new system to allow foreign individual investors to invest directly in the local market – somewhat to my surprise, since when this proposal emerged in November, I though there was a big question mark over whether they would ever be implemented.

So what do the details look like? While the investors will be known as qualified foreign investors (QFIs), the restrictions to be qualified look less tough than we light had expected. Essentially it seems that they will need to be residents of a country that comply with standards on money laundering and are members of the Financial Action Task Force.

However, it was always too much to hope that such a bureaucratic government would allow unhindered access for foreigners to its markets. At first glance, the system is rather cumbersome and is unlikely to see a flood of foreigners into Indian shares.

Investors will have to open a demat account – the Indian term for an account in which securities are held in dematerialised electronic form – with one of a very limited number (currently six) of Qualified Depository Participants (QDPs). Each investor will only be allowed one demat account with a single QDP.

The QDPs will apparently be responsible for:

  • verifying the identity of the foreign investor;
  • handling the buy and sell orders, although it seems these can be executed by a broker of the investor’s choice;
  • receiving money from abroad and remitting excess cash (investors will only be allowed to hold uninvested cash onshore for a limited time – apparently five days);
  • taking care of tax procedures (including registering the QFI for a local tax number);
  • ensuring the QFI does not issue participatory notes or other derivatives to other foreigners against their shares

This suggests that regulatory burden of managing QFIs has essentially been placed on the QDPs. So while there does not appear to be any attempt to formally limit the scheme to larger investors, it would not be surprising if we see the QDPs only willing to accept larger accounts in order to make this cost-effective.

At present, only Kotak, HSBC, Deutsche Bank, Citibank, SBI and India  Infoline are QDPs. The first five are DPs for the National Securities Depository (NSDL), which is the larger depository and handles trades on the National Stock Exchange, while India Infoline also acts as a DP for the Central Securities Depository (CDSL), which handles trades on the Bombay Stock Exchange.

There will also be limits on how much QFIs can hold of a company – this will be 10% in total, with each investor limited to 5%. On the plus side, these limits are over and above those in place for foreign institutional investors (FIIs) – so QFIs will still be able to buy into stocks where the FII limit has already been reached.

Overall, this is a step forward for opening up India’s markets, but it remains to be seen how much difference it will make for the average investor. At first glance, it doesn’t look like firms such as Interactive Brokers – which offers dealing in Indian shares to residents, Non-Resident Indians and Persons of Indian Origin (who are allowed to invest under separate rules) – will easily be able to extend this to all clients.

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