As the saying goes, “Change is the only constant”.
However, experience tells us that fundamental changes to a system are, more often than not, triggered by extraneous and unexpected events.
Today, the world is going through such a transformational event that has materially altered the way we work, the way we interact and the way we live.
The ultimate investment destination
India, in spite of being replete with many resources – natural and human, has long been a capital deficit country. This deficit makes it harder for the country to ably and efficiently put other factors of production to effective use for uplifting the living standards of its people.
Thankfully, post the economic liberalisation of the ’90s, our decision-making has been cognisant of the capital deficit problem. Over the years, tremendous efforts have been made to put together, through progressive developments, one of the most conducive regulatory framework amongst major emerging economies for attracting foreign capital.
More specifically, the foreign portfolio investment regulatory framework that commenced with the Government of India Guidelines of 1992 has witnessed some radical reforms.
India goes global
The 1992 Guidelines prescribed eligibility criteria, investment restrictions/conditions and allowed "reputed foreign investors, such as Pension Funds, etc., to invest in Indian capital market” by providing an enabling regulatory framework for “such investments by Foreign Institutional Investors (FIIs)”. A concessional tax regime was also announced for FIIs with a view to attract investments.
Subsequently, the FII Regulations, 1995 replaced the Guidelines, benefitting from the overall experience gained through the Guidelines. Over a period of time, the FII Regulations were vastly liberalised by relaxation in eligibility norms and investment restrictions / conditions.
Albeit for a short period, a parallel Qualified Foreign Investors (QFIs) framework came into existence in 2011 that did not require the investors to register with SEBI. Subsequently, FPI Regulations, 2014 unified and replaced the FII and QFI systems and further liberalised the framework. As a significant change, SEBI discontinued processing FPI registrations and Designated Depository Participants were empowered to carry out this responsibility on behalf of SEBI.
A similar approach has continued under the extant SEBI (FPI) Regulations, 2019, which in itself has brought about several positive changes to the framework.
Reform. Rebound. Restart.
The importance of portfolio investors in the economic chain cannot be understated at all. As the secondary market is vital for the existence of the primary market that directly interacts with the real economy, a variety of secondary market players and investors are necessary to make this system work. Thus, the need to attract capital into the economy is inextricably linked to getting capital into the secondary market.
The feedback from foreign investors indicates that there are a number of positives that the framework in India offers e.g., virtually all possible classes of investors are permitted and investment avenues across asset classes and types of instruments available to FPIs are fairly wide.
Also, there has been substantial easing of access norms including elimination of the broad based criteria, simplification of registration norms and related operational processes; and with the recently launched Common Application Form (unified application form for FPIs registration and applying for PAN), the process is expected to get further streamlined.
Rewriting the FPI growth story
The pandemic has caused a severe strain on the economy, demanding a fundamental rethink on how India can attract more capital. Here are a few measures that can help the country go from strength to strength to attract more foreign capital.
- Eliminating the need for FPI registration altogether and allow foreign investors to, without any operational hassle, invest into the market subject to fulfilment of the necessary risk-based KYC norms.
- Overhauling the limits across equities and debt investments and the related monitoring requirements. This is a rather complex and operationally intensive aspect that not only presents a compliance challenge to the FPIs and other market participants but also puts a strain on regulatory resources.
- Removing the 10% investment limit that FPIs are subject to or at least enhance it to 15% considering that the investors are, in any case, subject to the Takeover Code from a regulatory standpoint.
- Simplifying the tax regime and government levies given the common perception of it being highly onerous for foreign investors. A simple and investor-friendly tax regime shall go a long way in increasing India’s appeal to foreign investors whilst keeping in mind the Government’s revenue needs.
- Reaching out to new markets to highlight the India story. A number of countries that have large domestic fund houses, pension funds etc. do not figure in top countries from where India has received FPI investments and there is a significant upside to create awareness about India’s status as one of the top investment destinations.
It is imperative for us to take further steps towards building liquidity and depth and to ease procedural and administrative aspects of settlement and reporting.
Marching towards prosperity
Thanks to concerted efforts from SEBI, RBI and the Government, India has made fantastic progress in opening up the doors to foreign investors. However, there remains a stiff competition from other emerging economies to attract foreign capital.
As such, with due consideration to the objectives of the framework, India needs to keep its focus on liberalisation and simplification. The right set of reforms and timely execution of these will further help improve India’s weightage in global equity indices and possible inclusion in bond indices – only to propel India upwards in the chart as far as foreign flows are concerned.