There is some good news for the capital markets . The government has allowed foreign individual investors to buy up to USD 10 billion worth of domestic shares cumulatively through domestic mutual funds. This has been initiated as a response to the recent decline in foreign direct investments. 

This liberalisation move, allowing this segment of investors, known as qualified foreign investors (QFIs), was first proposed in the 2010-11 Union Budget. QFIs include individuals and bodies such as pension funds, and they will be allowed to invest through two different modes. So, foreign investors can now increase their investments in domestic stocks. SEBI will regulate the channels for investments . It will frame the detailed eligibility conditions by August 1. 

In the first mode, the QFIs can open demat accounts with SEBI-registered depositories that will execute their orders and also hold units on their behalf. These depositories will need to have a paid-up capital of at least Rs 50 crores. In the second option, eligible investors will place orders with a foreign depository to buy units on their behalf. This depository will in turn place the order with a custodian bank here which will purchase the units and hold them. The foreign depository will then issue a unit confirmation receipt (UCR), to the investor against the units. UCRs are similar to participatory notes. The UCR can be encashed in a foreign currency. But, in either case, the QFI can open only one account with a depositary. 

Only KYC-compliant retail foreign investors will be allowed to invest and the depositaries will have to ensure proper KYC of QFIs as per SEBI norms. The mutual funds will also undertake KYC norms of QFIs. 

Only investors compliant with the global anti-money laundering laws - Financial Action Task Force - will be allowed to invest. Each investor can open only one account. Presently, only foreign institutional investors ( FIIs ., sub-accounts registered with SEBI, and NRIs are allowed to invest in mutual funds. 

Anyone who can give sufficient proof to the bank or regulated brokerage can open an account. The move opens the domestic equity markets to global retail investors for the first time, bypassing the FII route. A QFI can be an individual , or a pension or insurance fund. 

This is the first major overhaul of the rules for foreign investments in domestic markets since 1991, when foreign investors were allowed in through SEBI-registered FIIs. Overseas retail investor participation will improve the stability of the domestic markets. For mutual funds, besides widening the investor base, it gives access to international investors. Since it is going to be retail investments, it will be more stable than with FII money. 

It is expected to have a major impact on the size of the markets. The quality of investments coming into the equity markets will be very strong and the retail participation will bring longterm stability to the markets. 

Till now, major domestic mutual funds have had to set up bases abroad when they wanted foreign investments. To begin with, USD 10 billion is the total ceiling on QFI investments here but it is subject to review after six months depending on the response. 

The decisions of foreign retail investors will depend on the returns on investments here as against other countries. So, India will have to compete on a global scale for these investments.

Source: Economic Times