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Policy Reforms to Benefit Qualified Foreign Investors
On 1 January 2012, the Government of India announced a major policy reform on the proposal of letting Qualified Foreign Investors to directly access the Indian equity market. With this key policy decision, the Government has sought to reinforce its commitment to liberalise the Indian foreign investment policy framework. The decision to grant direct access to Indian equity markets to QFIs is expected to provide a much needed impetus to the Indian capital market. The Securities and Exchange Board of India as well as the Reserve Bank of India are expected to issue circulars providing the operational framework of proposed policy change by 15 January 2012. Taxand India considers the potential meaning of this policy change for multinationals ahead of the operational frameworks being announced.
Direct participation of foreign investors is envisaged only for Foreign Institutional Investors ("FIIs") and Non-Resident Investors ("NRIs") under FII Regulations and Portfolio Investment Scheme ("PIS") respectively. Currently, foreign individuals who are willing to invest in India and who do not qualify as NRIs are forced to take recourse to the sub-account route prescribed under the FII Regulations or to Offshore Derivative Instruments. Practically, SEBI has been hesitant in granting such approvals. In its bid to liberalise the foreign investment policy, the Indian Government had, in August 2011, permitted QFIs to directly participate in Indian Mutual Fund schemes. The permission granted to QFIs to directly access the Indian equity market has been described as 'the next logical step'.
Taxand India provides a brief overview and analysis of the proposed guidelines
While the decision to grant direct access to the Indian equity capital market to QFIs is a welcome move towards liberalising the overall foreign investment policy framework, the efficacy of this decision would essentially depend on the construct of its operational guidelines. The onus is now on SEBI and RBI to do a balancing act between formulating a suitable governing structure for proposed QFI regime such that it does not import onerous conditions that may stifle investments while ensuring that a suitable mechanism for undertaking robust due diligence is also in place.
Such stratified yet specific set of regulations would be effective in avoiding challenges from potential overlap of multiple policies and also in simplifying the overall policy framework for non-institutional investors. However, the feasibility of such consolidated framework for non-institutional investors as also the consequential impact that the proposed QFI regime may have on extant regulations would need to be analysed based on the departmental guidance to be issued by SBI and RBI in the form of circulars.
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