Govt allows new $3 billion casement for FIIs in infra schemes

In order to further liberalize the portfolio investment route, the government and capital market regulator the Securities and Exchange Board of India (SEBI) on August 9 allowed foreign investors who meet the Know-Your-Customer (KYC) norms, to invest around $3 billion in debt instruments issued by the domestic infrastructure companies.

Finance Minister Pranab Mukherjee in this year’s budget had announced to allow foreign investors to invest in SEBI registered Mutual Funds (MFs), who meet the KYC norms. This announcement of Finance Minister was to liberalize the portfolio investment route in the Indian Capital Market. The foreign investor will get the benefits which are available to them for investing in equities. 

Now foreign investors can directly invest around $13 billion in the Indian capital market by using mutual fund route. Earlier, government had limited the investment by foreign institution investors (FIIs) however, in order to bring more stability in the capital flow, government had expanded the limit. Investment from retail investors are considered to be more stable than the portfolio, often called hot money.  

However, the announcement by the government has come at a time when the sentiment in the global markets is bearish on the degrading of the US sovereign and debt crisis in the Euroland. This uncertain global condition has raised fears of slowdown in the capital inflow into India and possible withdrawal of FIIs. This announcement by ministry of finance has come after the Pranab Mukherjee’s discussion with the regulators and stakeholders.

On August 9, both Reserve Bank of India and SEBI issued the notification for the same, SEBI said that qualified financial investors (QFI) - which can include individuals, groups or associations, resident in a foreign country that has complied with the KYC norms - can buy units of equity or debt funds in the primary market, but cannot trade in the secondary market. However, the limit for equities is $10 billion, after reaching QFIs investment to $8 billion in equity scheme; SEBI would auction the remaining limit to foreign investors who can then buy the units from funds of their choice. Likewise process would be followed for the investment in debt scheme, after hitting $2.5 billion. The overall limit for investing in debt will be around $25 billion, including FIIs set by the RBI in corporate debt issued by infrastructure companies.

Qualified Foreign Investors (QFIs) is an individual, group or association, resident in a foreign country that is compliant with Financial Action Task Force (FATF) standard and that is a signatory to International Organization of Securities Commission's Multilateral Memorandum of Understanding. QFIs do not include Foreign Institutional Investors or Sub-accounts as these are already permitted to invest in Equity and Debt markets in India as per the extant guidelines of SEBI and RBI.