Deena Mehta of Asit C Mehta Investment Intermediates says that the government’s move to open up flows from qualified foreign investors, or QFIs, is a game changer for the Indian equity market. “I feel that this is a very positive enabler for people to come into the Indian market,” she explained.
She further goes on to say that this will have three benefits for the Indian market. “The number of people who can invest in India has been considerably broadened, the process of investing has been made simpler and the breadth of the market will increase,” she said.
Metha also believes that this move will help improve the transparency in the market and increase the number of countries investing in India.
Below is an edited transcript of his interview with Ekta Batra and Gautam Broker. Also watch the accompanying videos.
Q: Define what a qualified foreign investor (QFI) is and what this entire process would brig to the table? Is it a game changer for the Indian equity market in terms of increased inflows?
A: Definitely. A QFI is a person who can be an individual resident or an organization which is belonging to the 33 jurisdictions which is complying with the financial action task force (FAFT) standards for purpose of investing in India. So the footprint which is there of people who can invest in India, which was till now only through the FII route, has been considerably broadened and people belonging to these 33 countries, they can invest into India - that is the first thing.
Now all these investors need is a DP account and a bank account. Of course there would be a broker through whom the investments would happen. Instead of the complicated process of opening up some account with an FII and then investing in the market, where there was a lot of compliance and paperwork was involved, that entire process has been bypassed and it is now a much simpler account which can be opened. So that is the second big advantage which is there.
I think that as of now the market is a little, lackluster but the moment the market becomes attractive, I am sure that it will really bring in lot of money from the foreign countries. Today FII limit, or how much can be invested in a company is fixed. That limit has also been expanded by 10%; 5% can be individual and total group of the QFIs can be 10%. So the breadth of the market would also get increased because of the higher limit which is there. So net-net, I feel that this is a very positive enabler for people to come into the Indian market.
Q: In the past, the criticism was that KYC norms were too onerous for participation. On that regard, how much easier is it now to step into the market?
A: If you look at the KYC norms, they would continue to be there. But now, if you are a foreign national or a HNI abroad, you can invest directly. Earlier, he/she had to open a sub-account, and then that sub account would have lot of compliances with the local authorities as well as the Indian authorities.
Also, because of these onerous KYC norms and opening sub account, P-notes used to get floated. We have heard lot of controversies about P-notes and the lack of transparency, so far as the P-notes is concerned, I think those issues will get addressed. Now in the new scheme of things, the P-notes route can be suitably addressed because they can reveal their identities and they can come directly through this QFI route which is there.
So I feel it is a major step forward even when it comes to having better transparency in the market. The transparency was compromised because of the onerous paperwork which was there, which in the new scheme of things we think would be simpler and better than what it was before.
Q: Would you say that this could do something to substantially benefit cash volumes versus the other suggestion of routing QFIs via mutual funds?
A: First we opened it through the mutual fund route, now through the equity route. So we are slowly opening up the entire basket of financial products which are there in the country
So I would say that it is not one versus the other, I think it is slowly making available all the products which this country is capable of giving to the investors.
Q: How is the participation of QFIs in mutual funds been up till now?
A: It is hardly started as such because company’s guidelines have not come. Some guidelines have come, but I think the knowledge which should be passed on to people that has not happened. So I would say that we have nil participation in mutual funds. I think lot of education is required.
Second thing is that the participation or the volumes which this segment would generate would largely depend on how attractive they see India as an emerging market, how it is able to perform, what is their perception about the future of the market, etc. Those things go into the volume impact of these suggestions. I think if you look at the structure of the market per se, this is a major development or a foundation stone which has been laid by SEBI and the regulators. We need to look at this from development and a long term perspective. I am sure the benefits of this will come. The moment people see the Indian market as a very attractive destination to invest, this lack luster feeling which is there in the market will subsidy and people would show interest.
Another thing is that FIIs are concentrated in Canada or USA. We will now see investment come from Eastern Europe, Australia and these countries also from where we do not have much FII participation. I am sure that individuals in those places would like to participate in the Indian market and it will open up lot more countries coming to India than the kind of FIIs concentration which is there.
Q: How much participation do you expect from the pension fund front, and do you expect volatility to decrease once there is more interest from that side?
A: Yes definitely. Pension funds have a long term view in market, but I think if the Indian government expects foreign pension funds to come in a big way, it should allow its own pension funds to participate in the market. I think the government needs to be a lot more liberal about investment of pension funds in the Indian market per se, only then will we have that demonstration effect and people will feel that if Indian can put their money, pension money in Indian market then foreigners will be really motivated.
As a business strategy, the fact remains that if people see good returns in the Indian market, they may come. But I think some kind of demonstration and policy framework is necessary whereby Indian pension funds participate in the Indian market before we expect lot of foreigners coming here.
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