Indian Stock Market Opened For Foreign Individual Investors

Indian Government has taken the first reform of 2012 and has given New Year Gift to all Foreign Individuals who wish to invest in Indian Stock Market. Earlier foreign investors were able to invest in Indian Stock Market via Global Mutual Funds, Unit Trusts or as an Institutional Investor. According to Ministry Statement, this policy will come into operation on 15th January and the move is intended to reduce volatility in stock market, make it more accessible to West and attract more funds into India.

It is clear that Indian Government is willing to capitalize on interest that global investors have shown on Indian economy which has grown strongly in past decade. It will also help in boosting Sensex which has lost 25% in 2011 and will also help in arresting the rupee fall as more inflow of dollar happens.

Who Can Invest?
A Qualified Foreign Individual or QFI. QFI ranges from an individual to a group of investors that comply with the international standards of Financial Action Task Force (FATF).

Under the new reform, the foreign investor will be able to trade in Indian markets by opening a demat account through a Securities and Exchange Board of India (SEBI) registered qualified Depository Participants (DP). The DP need to ensure that QFIs are compliant with all KYC and regulatory norms. It would also be responsible for deduction of applicable tax at source out of the redemption proceeds before making redemption payments to QFIs.

Salient Features of the Scheme:
1. RBI would grant general permission to QFIs for investment under Portfolio Investment Scheme (PIS) route similar to FIIs.

2. The individual and aggregate investment limit for QFIs shall be 5% and 10% respectively of the paid up capital of Indian company. These limits shall be over and above the FII and NRI investment ceilings prescribed under the PIS route for foreign investment in India.

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

4. DP shall ensure that QFIs meet all KYC and other regulatory requirements, as per the relevant regulations issued by SEBI from time to time. QFIs shall remit money through normal banking channel in any permitted currency (freely convertible) directly to the single rupee pool bank account of the DP maintained with a designated AD category – I bank. Upon receipt of instructions from QFI, DP shall carry out the transactions (purchase/sale of equity).

5. DP shall be responsible for deduction of applicable tax at source out of the redemption proceeds before making redemption payments to QFIs.

6. Risk management, margins and taxation on such trades by QFIs may be on lines similar to the facility available to the other investors.

Updates: Read about the Directives Issued By RBI for QFI Investment in India

I think, the timing of this move is not appropriate as major stock indices have fallen around 25% in 2011, eroding investor’s wealth after overseas funds withdrew a net of $380 million in 2011 compared to net inflow of $29 billion in 2010. The Indian currency has been falling steadily, inflation has been on higher side and interest rates have been heading upwards. Apart from these there are many social, political and economic issues which might stop a foreign investor to invest in India.

However, I believe that India is a strong story to buy and Foreign investors should take this opportunity in big way when local issues in India are settled down.

Also Read about Depositories , if you need more information regarding it.

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