Background and Proposal:
- The Securities and Exchange Board of India (Sebi) is exploring options to expand the ownership base for local risk assets by allowing overseas individuals to invest directly in India’s primary and secondary stock markets.
- Currently, foreign individuals can only invest in Indian markets through the Foreign Portfolio Investor (FPI) route.
- The proposal, discussed in a meeting with Sebi management and market participants, is still in the preliminary stages and would require approval from both the Finance Ministry and the Reserve Bank of India (RBI).
Current Investment Framework
- FPI Route: Foreign investors currently access Indian markets through the FPI framework, particularly Category II FPIs, which can invest after registering with Sebi and using a local sub-custodian.
- Direct Investment Proposal: Sebi is considering allowing foreign individuals to directly open brokerage accounts and invest in listed Indian stocks, bypassing the FPI intermediary route. This could potentially ease compliance requirements for such investors.
Potential Benefits
- Broaden Investor Base: Allowing direct access could attract ultra-high-net-worth individuals (UHNWIs) from global financial hubs like London, New York, and Singapore, increasing foreign participation in Indian equities.
- Simplified Access: Direct market access could simplify the process, reducing reliance on institutional investors and promoting greater liquidity in Indian markets.
- Compliance Efficiencies: With direct access, investors may avoid the complex structures and costs associated with the current FPI route.
Challenges and Safeguards
- Regulatory Concerns: India has traditionally been cautious about allowing foreign individuals to invest directly due to the need for strict Know Your Customer (KYC) checks and anti-money laundering (AML) regulations.
- Potential Risks: Direct foreign investments might circumvent current checks, raising concerns about transparency and regulatory control. Additionally, overseas investors could potentially use Participatory Notes (P-notes), which have been criticized for lack of transparency.
- Foreign Direct Investment (FDI) Regulations: If an individual investor’s stake in a listed company crosses 10% through the FPI route, it is considered FDI, which is subject to sectoral restrictions.
- Compliance Framework: Experts emphasize the need for a robust regulatory framework to mitigate risks. Key measures would include ensuring proper tax payments, monitoring ownership limits, and addressing sector-specific restrictions under FDI regulations.
While Sebi’s proposal could potentially broaden foreign participation in Indian markets, any change in regulations will need to address key concerns related to compliance, tax, and transparency. The necessary safeguards and regulatory frameworks will be critical in ensuring the success of this initiative.
