Will the new RBI guideline bring in more QFI money?

In a bid to stem the depreciation of the rupee against the dollar, the Reserve Bank of India (RBI) on 25 June announced a few measures, including allowing qualified foreign investors (QFIs) to invest in mutual fund (MF) schemes that hold at least 25% of their assets (either in debt or equity or both) in infrastructure sector, under the current $3 billion sub-limit for investment in MFs related to infrastructure. If investments through this route were to pick up, it would boost assets under management (AUM) of schemes that receive QFI investments and will be a positive signal for local investors as well.

Last August, the Securities and Exchange Board of India (Sebi) came out with guidelines enabling QFIs to invest directly in Sebi-registered MFs. So far, investments from QFIs in domestic MFs haven’t picked up. However, the markets have hardly been conducive. Not only QFIs but domestic investors have also shied away from investing in stocks. Net outflow for equity schemes in April and May were Rs 539 crore and Rs 400 crore, respectively, and in the last fiscal, equity funds saw a net outflow of Rs 1,227 crore.

Will the move work?

Opinion in the industry is that this measure is likely to do very little. Let’s first understand what constitutes infrastructure. The original circular on QFI investments in domestic MFs specifies that the term “infrastructure” is to be used according to the definition in the external commercial borrowings guidelines by RBI. This includes sectors such as power, telecommunications, railways, roads including bridges, sea port and airport, industrial parks, urban infrastructure (water supply, sanitation and sewage projects) and mining, refining and exploration.

Given that, so far, QFIs haven’t showed much interest and only some asset management companies have gone overseas to attract them, it’s unlikely that much will change. “Initially, the main hurdle was fulfilling know-your-customer. Permanent Account Number (PAN) being made mandatory is also generally considered as hurdle for foreign institutional investors. However, with the support of the regulator and continuous involvement of custodians, this process has been smoothened though PAN remains one of the requirements,” says A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd. Other than the tedious documentation, domestic MFs have to actively market their funds overseas to generate significant interest. Also there are alternatives such as offshore funds investing in Indian securities which requires less paperwork. “Alternative routes of investing in Indian equities via dollar-denominated offshore funds are now available in many countries. Unless documentation is simpler and there is no tax to deal with, it is not feasible for foreign investors to look at this option,” says Akshay Gupta, managing director and chief executive officer, Peerless Funds Management Co. Ltd.

If QFIs invest

“We need local investors. Through this announcement it isn’t clear whether the idea is to generate long-term funds for infrastructure or promote MFs. As of now, most investors overseas have better options so we aren’t too hopeful,” says Rajiv Anand, chief executive officer, Axis Asset Management Co. Ltd. If at some point, this does take off, it will be positive as AUM for MFs will go up and fund managers will also be more diligent in catering to the foreign investors who seek a disciplined investment approach and risk management.

lisa.b1@livemint.com