According to Bloomberg’s survey of top international asset and fund managers2, 92 per cent of respondents say that they would increase participation in India’s financial markets if access was easier. A majority of investors (76 per cent) also find that it is more difficult to access India’s financial markets as compared to other markets they participate in.
As India looks to become a more attractive destination of funds held by foreign investors and increase foreign participation in its capital markets, market regulators recognised the need to further ease restrictions on foreign investors and entry norms for Foreign Portfolio Investors (FPIs).
In 2019, the Securities and Exchange Board of India (SEBI) introduced prominent changes like the removal of broad-based requirement, simplification of Know Your Customer (KYC) documents, re-categorisation and rationalisation of FPIs into two categories instead of three under the SEBI (FPI) Regulations, 2014, and eligibility of central banks of foreign countries to register as FPI.
1 World Economic Forum. (2020, February 19). India is now the world’s 5th largest economy. 2 Bloomberg. (2019, December 3). Accessing India’s Financial Markets.
To further improve the ease of doing business in India, the government of India introduced the Common Application Form (CAF) in January 2020.3 The CAF helps foreign investors coordinate with a single agency i.e. the custodian or Designated Depository Participant (DDP) in India for: (i) FPI registration, (ii) allotment of Permanent Account Number (PAN) with Central Board of Direct Tax (CBDT), (iii) KYC, and (iv) for opening of bank and dematerialised accounts in India. With this form, the government has eliminated various touchpoints for foreign investors when making investment in India. This paves way for FPIs to have seamless access to Indian capital markets through reducing processing timelines and enhancing operational flexibility.
3 Government of India. (2020, January 27). Ministry of Finance (Department of Economic Affairs) Notification No. F. No. 4/15/2016-ECB.
Over the past few years, India has progressively eased controls on foreign investments into the bond market. The Reserve Bank of India (RBI) had introduced the Medium-Term Framework (MTF) in October 2015, for investment by FPIs in Government securities such as Central Government securities (G-Secs) and state development loans (SDLs).10 The RBI has been progressively relaxing restrictions.
In March 2019, the Voluntary Retention Route (VRR) was introduced as a new channel of investment available to FPIs.11 The VRR aims to encourage FPIs to commit long-term investments into debt markets while providing them more operational flexibility to manage their portfolio by making the investments under this route free of macro-prudential requirements and other restrictions, otherwise applicable to FPI investments in debt securities.
Since the inception of the VRR route in March 2019, about USD7.1 billion has already been invested under the scheme as on 31 December 2019.12 To put things into perspective, data available on the website of National Securities Depository Limited showed that net FPI investment in debt category was close to USD3.74 billion in debt for the whole of last year.13
10 Reserve Bank of India. (2015, October 6). RBI A.P. (DIR Series) Circular No. 19 RBI/2015-16/198. 11 Reserve Bank of India. (2019, March 1). RBI/ 2018-19/ 135 A.P. (DIR Series) Circular No. 21. 12 The Economic Times. (2020, January 23). RBI raises VRR limit for FPIs to Rs 1.50 lakh crore. 13 National Securities Depository Limited. (2019). FPI/FII investments [Data file].
With effect from 1 April 2020, the RBI has allowed non-residents to invest in specified G-secs dated securities without any quantitative limit.14 To enable this, RBI has launched a separate channel called the Fully Accessible Route (FAR). The central bank has also increased the limit for investment by FPIs in corporate bonds from 9-15 per cent of the outstanding stock for the 2020 / 2021 financial year.
The moves to attract foreign investment in the India onshore debt market comes at a time when foreign investors are in exit mode due to the global COVID-19 pandemic. In March 2020, the net outflow by FPIs in the debt market was USD7.36 billion, while equities have seen a net outflow of USD7.54 billion, making it the highest-ever sell-off by foreign institutional investors in a month.15 The uncertainty around the impact on India’s economy, due to an extension of the country’s nationwide lockdown, means that volatility is likely to continue in the coming months.
As India starts to take tentative steps towards restarting its stalled economy, the government of India announced its decision to increase the limit on foreign direct investment (FDI) in defence manufacturing under automatic route to 74 per cent from the existing 49 per cent.16 After the government amended the FDI policy in April 2020, FDI, under the automatic route, excludes investment by China and other nations that share a border with India. Relaxation in FDI restrictions may help to get India’s economic growth back on track.
As India starts to take tentative steps towards restarting its stalled economy, the government of India announced its decision to increase the limit on foreign direct investment (FDI) in defence manufacturing under automatic route to 74 per cent from the existing 49 per cent.16
14 Reserve Bank of India. (2020, March 30). RBI/2019-20/201 FMRD.FMSD.No.25/14.01.006/2019-20. 15 Sultana, N. (2020, March 30). March sees highest ever sell-off by FIIs. Mint. 16 Ministry of Finance. (2020, May 16). Finance minister announces new horizons of growth; structural reforms across eight sectors paving way for Aatma Nirbhar Bharat [Press release].
India is full of opportunities and local regulators have made continued progress in easing access for foreign investors.
Regulatory changes continue to be a constant theme in India. The fast pace of change in India makes local partnerships highly beneficial for foreign investors who are keen to invest in India’s capital markets. A key role to be played by local partners is to provide foreign clients with an understanding of the investment landscape and requirements of the local capital market.
