After allowing qualified foreign investors (QFIs) to invest in equities indirectly through the mutual fund (MF) route in August, the government on Sunday paved the way for QFIs to invest in Indian equities directly as well. Individual QFIs will soon be allowed to invest up to 5% of the paid-up capital in any company and up to 10% of the paid-up capital on aggregate basis (all foreign individuals put together). These limits are over and above the cap earmarked for foreign institutional investors (FIIs) and NRIs who can directly invest in the Indian equity market.
The government hopes that the move will help in widening the class of investors and reduce market volatility. It also hopes to attract more foreign funds. Amid slowing economic growth, FIIs pulled out as much as around Rs 2,800 crore in 2011 from the Indian stock markets.
Will QFIs invest?
Experts are of the view that the step is in the right direction but it would only have a meaningful impact in the long run. "A big chunk of investment in the stock market is driven by perception," said Aseem Dhru, MD and CEO, HDFC Securities Ltd. "Due to a slowing economy and lack of policy initiative, the perception about India is not very bullish overseas. Hence, not much investment will be made in the short run. But as Indian growth story is likely to attract investors in the long run, the move may counter the volatile behaviour of FIIs."
"Investment by foreign nationals would depend upon the way Indian growth pans out," said Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities.
The limited impact the move may have in the near term can also be gauged from the fact that none of the MF firms have taken any initiative to expand their reach outside India despite government allowing QFIs to invest in equity schemes of MF houses last year. And probably this is the reason why the capital market has not reacted much to the news.
The other factor that could deter foreign investor from investing in India is exchange rate fluctuation. "While, it is relatively easier to evaluate a particular company, predicting currency movement would not be easy," said Vinay Agarwal, executive director, equities brokerages, Angel Broking Ltd.