The Securities and Exchange Board of India (Sebi) is working on a policy to allow certain categories of foreign investors to invest in Indian securities markets through the automatic route, without having to register themselves with the regulator, as is the current norm.
The proposed automatic approval will be subject to KYC (know-your customer) requirements being complied by brokers and custodians, through whom foreign investors carry out their transactions.
FIIs such as pension funds, endowment funds, university funds, insurance companies, banks and mutual funds are likely to be among the foreign institutional investors that may be allowed to invest directly in the Indian market, officials familiar with the development told ET.
They said the capital market regulator was deliberating whether to do away with the registration process for any entity. However, the view taken by RBI on this will be crucial in formulating the policy. In the past, the central bank had expressed reservations relating to KYC norms given the threat of money laundering and terror financing.
Currently, even though Sebi does the FII registration, it is the custodians of these investors who ensure that KYC norms are being complied with, and also maintain their own records of transactions.
Sebi has already started discussions with market intermediaries to understand how the FII registration process works in other emerging markets such as South Korea, Taiwan and Singapore. In some of the markets such as South Korea and Taiwan, foreign investors have to just fill an application form and can start trading within two days.
Financial sector regulators are also looking at the issue of distinction between foreign direct investment (FDI) and foreign institutional investment. Their view is that portfolio investment should not be considered for FDI limit since portfolio investors just have trading interests.
Another important move considered by policy makers is to allow any overseas entities, including NRIs (non-resident Indians) and OCBs to invest in the local stock markets, provided they identify themselves under the KYC norms.
“There should be no discrimination between non-resident Indians and other investors...since NRIS are already bringing in so much of foreign exchange remittances into the country,” an official associated with the exercise said.
Currently, NRIs are allowed to invest through different category or schemes such as the Portfolio Investment Schemes — they can pick up to 5% in one company. They can also invest through a broad-based fund, which has at least 20 investors with no investor holding more than 10%.
“Once the restrictions on NRIs are removed, it will enhance the inflow of investments in India substantially,” said a senior official with a law firm involved in the FII registration process.
Following the stock market scam of 2001, investment by NRIs has become more difficult, since overseas corporate bodies or OCBs were banned. The regulator is likely to put out the consultative policy paper for public comments shortly.
Meanwhile, the Sebi board, which will be meeting this week, is likely to discuss the future of regional stock exchanges.
In the recent past, Sebi had appointed a committee to study the future of regional stock exchanges — post-demutualisation under the leadership of G Anantharaman, former Sebi whole-time member.
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