Good news for overseas investors in India

Sebi's reforms on foreign investment were overdue and these changes are likely to have positive effects in the long run.

At its board meeting on Tuesday, the Securities and Exchange Board of India (Sebi) made several key changes to investment regulations. These affect foreign investors, angel investors and share buybacks.

The regulator also eased membership norms for the National Stock Exchange’s debt segment. The changes should have positive effects in the long run. The most important change pertains to the registration and reclassification of foreign investors.

The market regulator has harmonised identity verification requirements as suggested by the K M Chandrasekhar Committee.

The regulator will cease to distinguish between foreign investors in terms of institution versus retail, and it has considerably eased the know-your-client norms. This will make it easier for overseas investors to enter India.

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The three existing categories of foreign institutional investors, sub-accounts and qualified foreign investors will be clubbed together as foreign portfolio investors (FPIs) and reclassified into three categories according to risk profiles.

Instead of direct registration with Sebi itself, FPIs may now register with respective depository participants.

Investments by an overseas entity in a listed Indian company will be treated as “portfolio” until a threshold limit of 10 per cent of equity. Beyond 10 per cent, they will be treated as foreign direct investment.

In order of importance, the next key change is the easing of membership norms for the debt segment of stock exchanges. No additional deposit or annual fee will be charged for existing brokers or clearing members.

New members must deposit a nominal Rs 10 lakh and pay an annual fee of Rs 50,000. This should encourage participation and create a more liquid secondary market for bonds.

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Allowing start-up ventures to list without initial public offerings on the small and medium enterprise segment of stock exchanges should bring comfort to angel investors, who now have an easier exit route.

Sebi will also allow angel funds to invest in start-up ventures under the alternative investment funds regulations.

The rules for share buybacks have been tightened in an attempt to stop manipulation by cynical promoters, who often announce frivolous buybacks.

The new provisos state that buybacks must be completed in six months (the earlier limit was one year), and at least 50 per cent of the buyback must be utilised to avoid penalties.

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Given the current global scenario, the changes in norms for foreign portfolio investors will probably not trigger a reversal of the recent trend of foreign exchange outflows. 

FPIs have been net sellers to the tune of over $5.5 billion (debt and equity combined) in June.

The selling accelerated after the US Federal Reserve implied that the tapering of the quantitative easing programme may start fairly soon, leading to a “risk-off” attitude.

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The falling rupee and the widening current account deficit are worrying factors that have induced FPIs to aggressively reduce India’s exposure. 

In turn, the selling leads to more intense pressure on the rupee, which is causing a negative feedback loop and triggering more selling. 

It is beyond Sebi’s brief to tackle the macroeconomic situation. Clearly, it needed the looming threat of a foreign exchange crisis to induce a reduction of red tape -which should eventually lead to larger overseas participation and more portfolio inflows.