A panel constituted by the Securities and Exchange Board of India (Sebi) has proposed wide-ranging changes in our Foreign Portfolio Investment (FPI) regime to attract greater capital flows from overseas. Key among the 50-odd changes are proposals to raise the cap on foreign investment, let private banks invest on behalf of clients, and to ease the country’s registration processes, particularly for well-regulated entities. These are pragmatic recommendations that could turn India more attractive to global investors, who are keen to participate in our growth story but are often put off by Indian strictures. Increased inflows would be beneficial not only for companies, which would be able to diversify their capital sources, but also for Indian capital markets that ought to welcome wider participation. In addition, such inflows would help finance India’s current account deficit and support the rupee.
Take the increase in the foreign investment cap first. Currently, FPIs must hold less than 10% of a company’s equity. Individual firms can, if they so choose, raise this limit in their sector of operations, but few have taken the trouble to do so. As a result, portfolio investors find too many good Indian shares unavailable for purchase. Under the proposed rules, the cap for FPIs may be set by default at the applicable level for a sector. Companies that wish to reduce it would be able to do so with the approval of their boards, but the general effect would be to invite a larger slice of offshore capital. The panel also wants entities such as foreign pension funds, which typically have relatively low-risk money to invest, reclassified in a way that eases their compliance burden. Similarly, private banks will be permitted to invest in custom-picked assets on behalf of foreign investors, since they would no longer need to maintain a common portfolio for all clients. This would provide relief for those deterred by the rigmarole of registering themselves with Sebi, such as high net worth individuals, family funds and even big funds with small allocations of their corpus to India.
Sebi has invited comments from the public before the proposals are implemented. While the rules are broadly welcome, some concerns still need to be addressed. The round-tripping of unaccounted-for money, in particular, remains a major worry. Ill-gotten or tax-evasive wealth in India has been known to get sneaked abroad by means of under- or over-invoiced trade deals, for example, and routed back into the country through dummy overseas entities on behalf of shady clients. India had faced a problem some years ago with participatory notes, and tough strictures had to be placed on them to prevent anonymous investments. It’s not clear if the proposed rules plug all the gaps through which money laundering services may be availed of by tax evaders. They seem to rely too much on foreign know-your-customer norms to identify whose money is coming in. Even if banks are directed to disclose lists of investment beneficiaries every three months, as proposed, this may not be foolproof. What India needs is a larger share of the investible surplus that the rich world has, not black money slipping out and returning clean. Of course, some of the inflows may also be “hot money”, ready to flee at short notice. But fickle funds have a role, too. They signal the expectations of active and finely attuned investors. Legal money should be allowed.