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 more significant 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 ease the country’s registration processes, particularly for well-regulated entities.
These are practical recommendations that could make 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 for companies, which would diversify their capital sources, and for Indian capital markets that ought to welcome full participation. Also, 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. If they so choose, individual firms can 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 appropriate 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 foreign 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 foreign investors since they would no longer need to maintain a current portfolio for all clients. This would provide relief for those deterred by the bureaucracy of registering themselves with Sebi, such as high net worth individuals, family funds, and even significant funds with small allocations of their corpus to India.