Mumbai: The finance ministry is in discussion with financial regulators to relax the entry norms for foreign retail investors into India’s Rs7.12 trillion mutual fund (MF) industry, according to two government officials familiar with the development.
The February budget allowed foreign retail investors to invest in Indian MF schemes in an effort to improve inflows into an otherwise stagnant industry and, subsequently, in August, the capital market regulator Securities and Exchange Board of India (Sebi) laid down norms for such investments. The move, though, has remained a non-starter due to stringent entry rules.
The Reserve Bank of India (RBI), Sebi and the finance ministry are currently reviewing the norms to facilitate entry of so-called qualified foreign investors, or QFIs.
Sebi headquarters in Mumbai. File photo
“One of the key obstacles seems to be the requirement of permanent account number, or PAN, for such investors. It is being examined whether QFIs could be exempted from such requirements,” said one of the persons, speaking on condition of anonymity, as the matter is yet to be formalized.
“Requirements like PAN and demat accounts are sacrosanct at the moment. While framing the norms, these issues were taken seriously by the regulators. As they are discouraging investors, the plan is now to relax these norms as the available information about the prospective overseas investors could be enough to meet the eligibility criteria for investing in Indian mutual funds,” said the second person who, too, did not want to be identified.
“The QFIs already comply with rules of their respective countries’ regulators. They are smaller in size than foreign institutional investors (FIIs), but the risk remains and, hence, we cannot do away with all requirements, but can modify them and make them less stringent,” the second person added.
“This relaxation will help, but there may still be a few practical difficulties that could come in the way when things actually start moving,” said Srinivas Jain, chief marketing officer at SBI Funds Management Pvt. Ltd that manages assets worth Rs47,731.39 crore.
There are 44 fund houses handling assets worth Rs7.12 trillion in September and PAN is mandatory for all categories of local investors. The industry’s size has remained stagnant for quite sometime, following a ban on entry load in August 2009. Entry load is an upfront commission paid to a distributor for investing in an MF scheme.
Sebi norms on QFIs’ investments in domestic MF schemes, say an MF or a depository participant (DP), shall require QFIs to submit necessary information for the purpose of obtaining PAN. The MF/DP may use the combined PAN-cum-know your client form, notified by the Central Board of Direct Taxes, for QFIs.
The rules allow QFIs to hold MF units in demat account through a registered DP or via a unit confirmation receipt.
Currently, only FIIs, sub-accounts registered with Sebi and non-resident Indians invest in MF schemes. To liberalize the portfolio investment route, the government enabled Indian MF schemes to have direct access to foreign investors and widen the class of foreign investors in Indian equity markets.
“The government should at least free up the routes of foreign investment. The foreign investor doesn’t have much of a choice with markets being shaky. They can buy India funds if they want. If mutual funds really want to tap foreign retail investors, they should first register themselves in the countries of their choice,” said Dhirendra Kumar, chief executive officer (CEO) of Value Research Online Ltd, a Delhi-based MF tracker.
Retail money lends stability to a market, as such investors are typically invested for a longer term than institutional investors. Still, foreign retail investors are absent in the domestic fund industry for a variety of reasons. The entry norms are stringent; so are the registration norms for domestic fund houses to be able to tap the investors. Besides, India-focused funds with easier investment norms also discourage direct investment in MFs. Such funds invest in Indian markets through FIIs or the sub-account route.
An official at one of the largest domestic fund houses said companies need to brand themselves first to attract overseas investors, who are more comfortable with global firms that offer India-focused funds. “Marketing initiatives will be a must; tie-ups will be important and they have to be first made aware of Indian markets,” he said, asking not to be identified.
There are at least 60 global fund managers with such India-focused funds. The major names include the Hongkong and Shanghai Banking Corp. Ltd, Fidelity International, Morgan Stanley, JPMorgan Chase and Co., and Temasek Holdings Pvt. Ltd, among others.
“Our regulations are complicated. Everyone wants to enter India, but the regulations are unfriendly. If they (the government) indeed relax the entry rules, it will help the industry to tap the South Asian markets, to begin with. Tapping Europe and the US will be a bit difficult due to stringent registration processes with their respective regulators,” said the India-business CEO of a Scandinavian fund house who did not want to be identified. The aggregate investments by QFIs are capped at a total $10 billion (around Rs52,000 crore today) for equity schemes.
The finance ministry last week announced that it will take steps to allow freer flow of foreign investment into the domestic debt market, and indicated that it was considering allowing foreign retail investors to buy Indian stocks directly.
The ministry raised the ceilings for investments by FIIs in corporate and government bonds by $5 billion in each category.
The move to relax the entry norms for foreign retail investors assumes significance in the context of weak FII flows to India, ongoing slump in equity markets and the persistent fall of the local currency vis-à-vis the dollar. The local currency hit its lifetime low on Monday. MFs can accept subscriptions from QFIs till investments by such investors reach $8 billion in equity schemes and $2.5 billion in debt schemes.
“While the thought of getting QFI into India is good, overseas retail investors may first look to choose from dollar-denominated India funds. The investor base looking for rupee-denominated funds based on local securities is relatively smaller at present,” said an official at AxisAsset Management Co. Ltd, who declined to be identified.