Shoring up the rupee

Shoring up the rupee

New Delhi: With an aim to attract more funds into the corporate debt market and to revive foreign capital inflows, the finance ministry on Tuesday allowed qualified foreign investors (QFIs) to invest up to $1 billion (around 5,560 crore) in corporate debt bonds.

This is the latest initiative to step up dollar inflows and help ease the pressure on the rupee, which fell to a lifetime low of 56.38 last week. Growing global risk aversion due to the worsening euro zone outlook, together with India’s slowing growth and widening fiscal and current account deficits, has turned away investors.

QFIs include individuals, groups or associations resident in a foreign country compliant with Financial Action Task Force norms.

While the proposal had been announced by finance minister Pranab Mukherjee in his budget speech in March, the details had not been disclosed.

Thomas Mathew, joint secretary (capital markets), said there is interest in such investment, especially from Gulf countries such as Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait and Oman. The government is planning a roadshow in these countries from 10-15 June to raise awareness among potential investors. Officials from the finance ministry, the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi) and the private sector will participate in the roadshow.

“These measures are expected to make the QFI scheme more attractive to potential investors and enhance flow of foreign capital into India," Mathew said. However, investments via the new route will be gradual, he said. “It will take 6-18 months to see optimum flow of funds. Such fund flows will be far less volatile and would have the invisible benefit of publicizing Indian companies overseas," he added.

The finance ministry also eased norms under which QFIs are allowed to open individual non-interest bearing rupee bank accounts with authorized banks in India for receiving funds and paying for transactions in securities they are eligible to invest in.

At present, QFIs are not allowed to open individual bank accounts. They can invest only through a common pooled bank account of their Sebi-registered qualified depository participant (DP).

QFIs will now be allowed to retain funds in their Indian accounts for an unlimited period of time. Earlier, they were required to transfer such funds to their overseas bank accounts if they were not invested within five working days of their receipt.

“This restriction was proving to be a dampener for genuine investors in view of the high cost of transfer of funds," a finance ministry statement said.

At this juncture, any source of dollar inflows will be appreciated, said Joydeep Sen, senior vice-president (advisory desk-fixed income) at BNP Paribas SA. “Moreover, any source of funding, in the face of a sizable government borrowing, to prevent crowding out of the corporate sector, is welcome," he added.

However, Jayesh Mehta, managing director and country treasurer at Bank of America NA, said the current regulations put the onus on filing tax returns on the DPs on behalf of QFIs, which has proven to be a non-starter. “QFIs will wait for operation clarity. It now depends how the scheme is implemented," he added.

According to a treasurer with a foreign bank, QFI investment is a contentious issue and has not succeeded in the equity markets. “I am not very enthused about the investment limit in the debt market. First, they need to sort out the equity market clarifications before they can be considered a player in the debt market," said the treasurer, who did not want to be named.

The finance ministry statement said RBI and Sebi will issue the relevant circulars incorporating the changes in the next seven days. “Clarifications on tax-related issues for QFIs would be issued shortly by CBDT (Central Board of Direct Taxes)," it added.

With the latest announcement, QFIs are now allowed to invest in all the three segments of the capital market—debt, equity and mutual funds. The government for the first time allowed QFIs that meet the know-your-customer norms to directly invest in equity mutual funds and infrastructure debt mutual fund schemes as part of the 2011-12 budget announcement. In January, the government expanded the scheme to allow QFIs to directly invest in stocks.

In the first five months of the calendar year, net FII (foreign institutional investor) inflows stood at $11.89 billion, 43% more than the year-earlier $8.29 billion, Mathew said. In corporate bonds, FII inflows till 30 April were 82,566 crore, 82.75% of the permitted limit of 99,777 crore, or $20 billion, he added.

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Graphic by Sandeep Bhatnagar/Mint

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Anup Roy in Mumbai and Reuters contributed to this story.